What a difference a week makes. Seven days ago, equity capital markets were toasting the success of British software maker Arm’s [NASDAQ:ARM] USD 5.3bn NASDAQ listing, but a quick reversal in the stock following the initial pop has led to questions whether the global IPO market is that open.

Arm went from trading 25% above its USD 51/share IPO price at the end of its first day of trading on September 14 to briefly below it by September 22, finishing the day just above water.

The narrative has also changed from how all global IPOs would be lifted by Arm, and the USD 660m IPO of Instacart [NASDAQ:CART], to why everything in the market now is different to those two deals; Instacart is also trading flat after an initial post-IPO pop.

Arm’s miniscule freefloat, below 10% of the company, likely helped boost its stock early and then contributed to the retreat once some of those shareholders began to profit-take.

“Low free floats are not a sign of IPO confidence,” said Craig Coben, former global head of equity capital markets at Bank of America. “Supply is squeezed, so it is unclear if an elevated stock price reflects true price discovery from the market or technical factors from the scarcity of freely traded shares.”

With the stock thinly allocated, and the lion’s share going to large strategic investors like Apple and Nvidia, many large funds that made up the tail were probably happy to take quick profits on a smaller position, Coben and another ECM banker suggested.

The reversal in the stock also calls into questions Arm’s USD 54.5bn IPO valuation, below the USD 70bn Japanese conglomerate Softbank [Tokyo:9984] had reportedly been targeting, but above this news service’s analysis based on investor views and peer multiples.

“Many European investors passed on it because they didn’t agree on the valuation and didn’t think they needed to own the stock,” according to a banker familiar with the deal.

Europe stands apart

The talk in Europe’s IPO market has now shifted from the recent US IPOs showing an open deal market, to the reasons why Europe’s new listing pipe is different.

German listings candidates Schott Pharma and defence gearbox contractor Renk are cyclical businesses of a more old-fashioned kind and the former has been widely praised by investors speaking to ECM Pulse. French software company Planisware is now also in the market with a listing attempt.

“Often at these points in the cycle you get the high-quality companies at the better valuations particularly because the market has been closed so long,” said one investor referring to Schott Pharma, adding that a cornerstone investment from Qatar Holding, a division of QIA, had been helpful for the issuer.

Schott Pharma’s IPO was covered in excess of its size and throughout its initial price range in hours, one of the strongest early pricing messages seen on a European IPO in 2023. Price guidance sent out today (25 September) points towards pricing around midpoint.

The first ECM banker, away from the Schott Pharma IPO, said that he was confident in the deal being a strong one given the feedback he had heard in the market.

Renk, which set an IPO price range this morning, is also of interest to investors, as ECM Pulse wrote last week, given the increased European defence spending since Russia invaded Ukraine.  

Hawkish Fed feeds valuation gap 

The major takeaway from Arm and Instacart’s trading is that investors remain very price sensitive, bankers say. This has been accentuated by the hawkish messaging from US Federal Reserve chairman Jay Powell last week that indicated the US Central Bank’s tightening cycle might not be over.

“The key for all these deals in Europe is not to push the valuation, then they will be fine,” said the second banker. “The takeaway from the Fed is that we are not going to have rates fall soon, and that puts to bed the idea things are going to be much improved by the middle of next year.”

The S&P 500 is now down around 4% from 14 September, the day of Arm’s IPO pricing and nerves over the direction of equities needs to be factored into IPO pricing.

“Issuers need to be conscious on price, it feels like the valuation expectation gap though has closed and perhaps the Fed talk and the price action on Arm will push it even closer between issuers and investors,” said the investor.

A third ECM banker agreed, saying that gradual valuation realignment was happening and that there were hopes that the fall in markets after the Fed meeting were temporary jitters and that investors were getting used to higher rates.

“That is why we are seeing another reason for increase in IPO activity, it is gradual, but going in the right direction.”

As seen by recent IPOs, valuation is still the key consideration for investors despite the market reopening. With Schott Pharma due to price soon, investors and advisors alike will closely monitor whether it trades up. And, more importantly, how long for.