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Tech IPOs Not Returning to the Market Anytime Soon

The volatility in the stock market and a higher interest rate environment is preventing tech companies from going public.



The volatility in the stock market and a higher interest rate environment is preventing tech companies from going public.

Tech companies who want to raise capital are waiting on the sidelines as market conditions remain challenging.

Tech stocks have taken a beating in 2022 with several companies who have seen the value of their shares plummet by over 60%, leaving the private companies waiting for capital markets to reopen, Thomas Hayes, chairman of Great Hill Capital in New York, told TheStreet.

As of Sept. 21, there will have been 238 days without a tech IPO that is valued at over $50 million. This dearth of tech IPOs beats the previous records that were set following the 2008 financial crisis and the dotcom crash in the early 2000s as companies wait for market conditions to improve so they can garner a good price when they do go public.


Fed's Tightening Policy Is a Culprit

The Federal Reserve’s pace of tightening and slowing down the economy by raising interest rates has impacted the credit and IPO markets, he said.

“The IPO and credit markets won’t clear until the Fed shows some signs of peak hawkishness,” Hayes said.

The pace of tightening needs to slow from "emergency measures" of raising rates by 75 basis point hikes to "beginning of end measures" of 50 basis point hikes or less, he said.

“Once markets can digest the new cost of capital, the capital markets will reopen,” Hayes said. “For now, it's been a one-way street higher regarding rates. We expect to see some relief soon.”

IPOs tend to “thrive when there are easy monetary conditions and rising markets and right now we have neither,” Steve Sosnick, chief strategist of Interactive Brokers, a brokerage based in Greenwich, Conn., told TheStreet.

The drought of IPOs could have been caused by the previous SPAC frenzy because a big chunk of companies that would have normally gone through the IPO process were swept up by them, he said. The SPACs were flush with cash that needed to be spent on deals and also offered a less rigorous path to going public than the traditional IPO process.

Private tech companies such as Stripe will hold off on going public until there is less volatility in the broader markets, Angelo Zino, an equity analyst at CFRA, a New York-based investment research company, told TheStreet.

“Clearly you need interest rates to stabilize and that would help valuations and sentiment across the tech space and environment to get private companies to potentially IPO again,” he said. “It’s been a crappy market because of the violent moves in interest rates to the upside.”

The rate hikes by the Fed have put a “major dent in tech valuations in the public markets,” Zino said.

Companies such as San Francisco-based payment provider Stripe and Mobileye, the self-driving division of Intel, will hold off on going public in 2022, he said. Mobileye filed for an IPO back in March while Stripe filed in 2021. 

Instacart, a San Francisco-based grocery delivery business, is another company waiting for improved market conditions and filed for its IPO with the U.S. Securities and Exchange Commission in May and had initially aimed to go public as early as September.

Tech Company Valuations Nosedive

High growth tech companies such Nvidia  (NVDA) - Get NVIDIA Corporation Report, Shopify  (SHOP) - Get Shopify Inc. Class A Subordinate Report and Snap  (SNAP) - Get Snap Inc. Class A Report have lost valuations ranging from 50% to 80% while other well known companies such as Snowflake  (SNOW) - Get Snowflake Inc. Class A Report, DoorDash  (DASH) - Get DoorDash Inc. Class A Report and Airbnb  (ABNB) - Get Airbnb Inc. Report have seen valuations and share prices “cut down sharply,” Zino said.

“There is no demand out there for companies to go public in this market - you don't have the investors at this moment and time,” he said.

Companies that are going to IPO are high-growth businesses that need to “sacrifice profits for growth,” Zino said.

The tech market will remain challenged over the next two quarters and will not improve until 2023, he said.

“It depends on how the market plays out, but the third quarter is not favorable for tech companies,” Zino said. “I do not see things getting interesting until the second quarter of 2023.”

Technology stocks are a “long-duration sector since they depend on earnings growth over time,” Anthony Chan, a former chief economist for J.P. Morgan Chase, told TheStreet.

“Rising interest rates lower the valuation of these companies as their higher long-term earnings are discounted heavily,” he said. “Higher interest rates are never a favorable development for companies with a larger share of their earnings arriving in later years compared to other sectors that enjoy a steady stream of near-term earnings.”

Some tech companies will have to be patient and wait for markets to return to more favorable conditions, Chan said.

“Many of these companies should wait until markets have greater visibility on the peak in yields that are hurting the valuations of these companies,” he said. “In my judgment, 2023 will be more favorable than 2022 and 2024 will be better than 2023 to go public.”

Tech companies going public too early face weaker valuations in the long run, which was seen by the disruptors in the fintech industry and pandemic darlings who saw declines of 60% to 80%, Art Hogan, chief market strategist B Riley Financial, told TheStreet.

“This keeps them at bay,” he said. “Companies are not going to the market.”

Going public too early can result in the next round of being a “down round,” Hogan said. “Their valuations will be below the last round of when capital was raised.”

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The delay means some companies will have to rely on burning through their current cash flow or even taking on “more expensive money” from private equity or angel investors, he said.

“The problem with waiting is having no access to capital markets,” Hogan said. “The good news is it lets your business mature more. In 2020-21 a lot of the IPOs were fast and disruptive companies that likely went public too soon.”

The number of deals could rise in 2023 since there will be a calmer yield curve since the Fed will have reached 4%, he said.

“It will be a combination of deals finally getting done and mergers could be more robust than IPOs,” Hogan said.

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Highlights of My Weekly Reading and Viewing

Timothy Taylor, “Some Economics of Pharmacy Benefit Managers,” The Conversable Economist, September 28, 2023. This is the nicest treatment of the facts…



Timothy Taylor, “Some Economics of Pharmacy Benefit Managers,” The Conversable Economist, September 28, 2023. This is the nicest treatment of the facts that I’ve seen. I confess that I’ve seen PBMs as something of a black box rather than doing the standard middleman treatment that Tim does.

Tim highlights the work of Matthew Fiedler, Loren Adler, and Richard G. Frank in “A Brief Look at Key Debates About Pharmacy Benefit Manufacturers,” Brookings Institution, September 7, 2023.

Ending paragraph:

As in most economic discussions about the role of middlemen, it’s important to remember that they (usually) don’t just sit around with their hands out, collecting money. Some entity needs to negotiate on behalf of health insurance companies with drug manufacturers and pharmacies. Some entity needs to process insurance claims for drug prices. I do not mean to defend the relatively high drug prices paid by American consumers compared to international markets, nor to defend the costs and requirements for developing new drugs, nor to defend some of the mechanisms used by drug companies to keep prices high. But while it might be possible to squeeze some money out of PBMs for slightly lower drug prices, and it’s certainly possible to mess up PBMs in a way that leads to higher drug prices, it doesn’t seem plausible that reform of PBMs is going to be a powerful lever for reducing drug prices.

Thomas W. Hazlett, “Maybe Google Is Popular Because It’s Good,” Reason, September 27, 2023. I think Hazlett is the best writer in economics. This piece is a good sample.

An excerpt:

The innovation was simple in design, complex in execution, and radical in result. The business achieved a rare triple play: First, a robust new web crawler devised a superior method for finding and tagging the world’s digital content, deploying cheap PCs linked in formations to achieve momentous computing power (Brin’s genius). Second, this more prolific database of global digital content was better cataloged. A clever “Page Rank” score evaluated keyword matches, countering the influence of scammers by scrutinizing the quality of their web page links (Page’s inspiration). Third, “intention-based advertising” displayed commercial messages to searchers self-identified as ready to buy. For instance, the internet user wondering about “coho salmon, Ketchikan, kids” gave Hank’s Family Fishing B&B in Alaska a digital target for its 10 percent off coupon, while signaling to Olay not to bother advertising its skin care products. This solved the famous marketing dilemma: “I know I’m wasting half my ad budget, I just don’t know which half.” Businesses loved these tiny slices of digital real estate, and Google mined gold.

Fiona Harrigan, “America’s Immigrant Brain Drain,” Reason, October 2023.


In June, The Hechinger Report outlined how foreign governments are welcoming U.S.-trained international students. The United Kingdom offers a “high potential individual” visa, which authorizes a two-year stay and is available to “new graduates of 40 universities….21 of them in the United States.” Recruiters from Australia are “attending job fairs and visiting university campuses” in the United States. From 2017 to 2021, according to the Niskanen Center, a Washington-based think tank, Canada managed to attract almost 40,000 foreign-born graduates of American universities.

Most international students want to stay in the U.S. after graduating, but very few are able to do so. The U.S. does not have a dedicated postgraduate work visa. Canada and Australia, meanwhile, have streamlined the steps from graduation to employment to permanent residency. Graduates in the U.S. can complete Optional Practical Training, but it does not lead to permanent residency and lasts a maximum of three years.

Personal note: Actually the maximum of 3 years for Practical Training sounds good. When I took advantage of the F-1 Practical Training visa to be on the faculty of the University of Rochester, the max was only 18 months.

David Friedman, “Consequences of Climate Change,” September 24, 2023. David does his typical calm, clear, masterful job of laying out the facts. He takes the IPCC reports as given and then follows the implications, uncovering a lot of misleading claims in the process. While David takes as given that the earth will heat about another degree centigrade by about the end of the century, he lays out why we can’t be sure that the net effects are negative or positive. Watch about the first 35 minutes of his speech, before he gets to Q&A. I would point out highlights but there is zinger after zinger. And he references his blog and his substack where you can get details.

The pic above is of David Friedman giving his talk.


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Russia’s Military Budget Set To Rise By 70%

Russia’s Military Budget Set To Rise By 70%

Via Remix News,

Russian military spending is set to rise by almost 70 percent — to €106…



Russia's Military Budget Set To Rise By 70%

Via Remix News,

Russian military spending is set to rise by almost 70 percent — to €106 billion — by 2024, according to a Russian Finance Ministry document published Thursday, an increase that illustrates Moscow’s determination to continue its military intervention in Ukraine despite the human and economic costs.

According to the document, Russian defense spending will increase by 68 percent in 2024 compared to this year and will reach 10.8 trillion rubles (€106 billion).

As a result, the amount allocated to defense will represent about 30 percent of total federal spending in 2024 and 6 percent of GDP — a first in Russia’s modern history.

The budget for internal security is set to rise to 3.4 trillion rubles (€33 billion), almost 10 percent of annual federal spending.

The priorities for this budget are outlined as “strengthening the country’s defense capacity” and “integrating the new regions” of Ukraine whose annexation Moscow has demanded, as well as “social aid for the most vulnerable citizens,” just months ahead of the Russian presidential elections in spring 2024.

Conversely, total spending on education, healthcare and environmental protection accounts for barely a third of the defense budget, according to ministry figures. Overall, federal spending will total 36.7 trillion rubles (€359 billion), a dramatic 20 percent increase over 2023.

The government, however, has explained little about how it will finance this large increase, as Russian Prime Minister Mikhail Musustin said last Friday that revenues from the sale of hydrocarbons will be down sharply and will account for “a third of next year’s budget” in 2024, whereas before the invasion of Ukraine, they accounted for half the budget.

The sector used to drive Russia’s growth, hydrocarbon sales are declining due to international sanctions and the European Union’s determination to move away from energy dependence on Moscow.

One indication that the government expects a delicate month ahead for the Russian economy is that it has announced that it has based its budget forecast on the assumption of a dollar worth around 90 rubles, thus betting on a weakening of the national currency in the medium term. The draft budget law for 2024-2026 is due to be sent to the State Duma, Russia’s lower house of parliament, on Friday.

Tyler Durden Sun, 10/01/2023 - 08:10

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Atlantic Overfishing: Europe’s Worst Offenders

Atlantic Overfishing: Europe’s Worst Offenders

Each year, agriculture and fisheries ministers decide on total allowable catches (TACs) for…



Atlantic Overfishing: Europe's Worst Offenders

Each year, agriculture and fisheries ministers decide on total allowable catches (TACs) for commercial fishing.

Scientific bodies, such as the International Council for the Exploration of the Sea (ICES), provide information on the state of fish stocks around the world and recommend maximum catch levels per zone to ensure sustainable fishing.

However, this scientific advice is all too often ignored by the authorities, jeopardizing the sustainability of marine resources.

Statista's Martin Armstrong shows in the following infographic, based on the latest report from the New Economics Foundation, these European countries are the worst offenders for this, having on numerous occasions set their fishing quotas in the North-East Atlantic in excess of the sustainability recommendations in recent years.

You will find more infographics at Statista

Sweden exceeded its recommended TAC by almost 33 percent in 2020 (the latest year available), equivalent to 12,000 tonnes of fish, followed by Denmark (6 percent, 20,000 tonnes) and France (6 percent, 17,000 tonnes).

Ireland, Belgium, Spain and the UK all exceeded their targets by between 2 and 4 percent.

The year before, in 2019, the overshoot of the sustainable fishing threshold in the zone was even more pronounced: 7 percent of the recommended TAC for Spain, 9 percent for France, 10 percent for Belgium, 18 percent for Germany, 20 percent or more for Denmark, the United Kingdom and Ireland, and 52% for Sweden.

Tyler Durden Sun, 10/01/2023 - 07:35

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