The success of Arm’s IPO is very encouraging for equity capital markets, but it would be a mistake to read too much into it.
After nearly two years of mostly bad news, the global IPO market has enjoyed some bullish headlines of the kind rarely seen since the heady days of 2020 and 2021. Arm, the UK chip designer, priced its $5.2bn IPO, including the greenshoe, at the top of the range last week. It subsequently traded up as much as 20% in the aftermarket.
The great success of the biggest IPO in the world this year is being cited as a sign that the market is beginning to turn a corner and improve, following nearly two years of slumping deal flow due to volatility caused by rampant inflation and rising interest rates.
Even including Arm, just $91.8bn has been raised via IPOs this year globally, down from $128.9bn during the same period last year and $445bn during the same period in 2021, when the market was at the height of its pandemic era boom, Dealogic data shows.
Arm’s success is encouraging, as is the return of other issuers to the market on both sides of the Atlantic, such as Schott Pharma in Germany, which has secured a €200m cornerstone order for stock from the Qatari Investment Authority. The glass company covered its €800m IPO throughout the range on the first day of bookbuilding on Tuesday.
Issuers are gradually adjusting to the new normal, and to the fact that the lofty valuations of the pandemic era have gone and are not coming back. The gradual return of technology IPOs shows that this process is well under way.
Investors also have greater visibility on the trajectory of inflation and the end of the current fiscal tightening cycle feels nearer. The Federal Reserve is widely expected to hold rates steady at its September meeting later this month.
A word of caution
However, there is a limit to how much the market can read into Arm’s success, and what it means for other issuers.
Arm’s IPO is the sort of deal that only comes along about once a year — the IPO of an asset that is so large, liquid, and high profile that it can get done against pretty much any market backdrop.
Last year, Porsche was the same. The German luxury car maker raised €9.1bn via an IPO at a time when the market was effectively shuttered to almost every other company.
At the time, sources close to the deal were at pains to point out that Porsche’s flotation had almost no bearing on the health of the broader IPO market, which remained extremely poor.
Arm is in a similar category to Porsche. While its success is extremely encouraging for both investors and issuers, it does not herald a full normalisation of the IPO market, which is still some way off and not expected until the first half of next year.
The real test of whether the market, particularly in Europe, is back whether it can absorb much larger number of midcap IPOs, which have mostly been absent this year, and whether more tech companies are now willing to go public at lower valuations than where they previously raised capital privately. Until this happens, the market would be wise to remain cautious.