Capital Markets Freeze Up as Market Volatility Persists

People walk outside of the New York Stock Exchange on July 25, 2022. Spencer Platt/Getty Images

It has been a hard year for companies that want to raise capital.

The initial public offering (IPO) market, which allows a company to raise money by selling shares to public investors, has witnessed a sharp decline this year, following a record year in 2021.

Public offerings in the United States are on track for their worst year in decades, according to forecasters. Volatility in the stock market, brought on by high inflation, rising interest rates, and growing recession fears, has slowed IPO activity to a halt.

In August, only nine firms submitted IPO filings to the Securities and Exchange Commission (SEC), much lower than the 10-year average of 23, according to a report by Renaissance Capital.

“The 2022 U.S. IPO market is on track to raise the lowest proceeds of any year in our firm’s 30-plus year history,” the report reads.

Investors have shown little interest in newly listed firms amid this year’s market downturn. Technology firms have been affected particularly hard by this trend.

The tech-heavy Nasdaq Composite is down by 24 percent so far in 2022, worse than the 15 percent decline in the S&P 500 Index.

The Renaissance IPO Index, which tracks the largest, most liquid newly listed public companies, has plummeted by more than 40 percent, pointing to a lack of investor interest in newly listed companies.

This month, yogurt maker Chobani pulled its IPO, which was the latest bad news for the IPO market. The company announced its withdrawal plan in a Sept. 2 letter to the SEC, after delaying the offering several times.

The IPO was expected to be one of the largest of the year, giving the yogurt producer a valuation of more than $10 billion.

Source: Renaissance Capital

In July, food retailer The Fresh Market and payroll software company Justworks also pulled their IPO filings.

According to Ernst & Young, the number of public offerings in the United States fell by 75 percent in the first half of 2022 from a year earlier, while proceeds from offerings plunged by 94 percent.

During the stock market rally in August, some analysts thought that IPO markets would recover this fall. However, not everyone is optimistic.

Tom Farley, former New York Stock Exchange president and current CEO of Far Peak, said in June that the capital markets are “completely dead” and won’t recover soon. Companies that believe they can go public in the second half of this year are wrong, he told CNBC.

The markets will be paying a lot of attention to two prospective mega-public offerings, Porsche and AIG-owned CoreBridge, as they test the waters this fall.

There’s an increasing urgency to obtain funding through an IPO or private market for many companies, especially for late-stage startups, according to a report by Pitchbook, a data provider for private capital markets.

“We have a lot of companies that are talking to their investors, and their investors are telling them not to expect new money any time soon,” David Peinsipp, a partner at law firm Cooley, told Pitchbook.

Debt Market

The corporate debt market is also under pressure as the Federal Reserve raises interest rates at the fastest pace in decades. Higher interest rates mean less income to pay off debt for many businesses, and this will make raising new funding more challenging.

The U.S. central bank has raised benchmark interest rates four times this year, with the fed funds rate reaching a range of 2.25–2.50 percent in June. Fed policymakers are expected to opt for another 75 basis-point rate hike during the central bank’s policy meeting on Sept. 20 and Sept. 21.

Higher lending costs will force businesses to borrow less, which then could reduce their business activities, investments, and hiring. Some are also concerned about default risks.

Corporate bankruptcies in the United States are already on the rise. Last month, 38 companies filed for bankruptcy, up from 31 in July, according to S&P Global Market Intelligence.

Market experts predict that the number of bankruptcies will continue to climb in the coming quarters. The largest bankruptcies this year with more than $1 billion in liabilities include Carestream Health, OSG Group Holdings, Aearo Technologies, Celsius Network, and Revlon.

Dozens of mortgage-lending companies have also either filed for bankruptcy, reduced staff, or been forced into mergers.