By Tom Zanki

Law360 (May 21, 2021, 5:40 PM EDT) -- The previously red-hot market for initial public offerings appears to be cooling following volatility that has made pricing IPOs trickier, prompting some companies to delay plans while others brave choppy markets. 

The number of operating companies moving through the IPO pipeline has shrunk in recent weeks. Four operating companies went public during the week of May 17, amounting to less than half the pace of the previous five weeks in which 43 companies went public, according to data from IPO research firm and fund manager Renaissance Capital.

Normally, the market for new issuances heats up during spring. But this year may be something of an anomaly. The IPO market exploded to record levels in the first quarter of 2021, coming off the heels of a robust 2020 that coincided with pandemic relief intended to rescue the economy.

"The IPO market has been on a very hot streak for the last year almost," said Avery Spear, a data analyst at Renaissance Capital. "We are starting to see it crack a little bit."

To be sure, select deals are still finding receptive investors. Swedish vegan giant Oatly AB raised $1.4 billion at the top of its price range and saw shares rally in debut trading on Thursday.

Construction software firm Procore Inc. exceeded its price range after raising $634 million and also saw shares jump on Thursday, while website hosting business Squarespace Inc., which went public via an IPO alternative known as a direct listing, sputtered in its debut Wednesday.

Signs of uncertainty became more visible during the week of May 10, when three companies — mortgage insurer Enact Holdings Inc., hearing services provider Hear.com and customer communications platform Zenvia Inc. — postponed their IPOs during a rocky stretch for the stock market. Enact and Hear.com said they will continue monitoring conditions for more stability.

Capital markets lawyers say companies remain interested in going public, though enthusiasm may be more measured now. Goodwin Procter LLP partner Joe Theis said technology companies — those in fintech, specifically — and life sciences firms are active in the pipeline.

"It's not breakneck pace, but it's still busy," Theis said. "As a general matter, people are still pretty optimistic that capital markets will remain receptive to new issuances."

Sichenzia Ross Ference LLP partner Greg Sichenzia, who counsels small companies going public, said he is seeing more offerings with warrants and other investor-friendly features compared to earlier this year, when the red-hot market favored companies. He added that a degree of exhaustion appears to have set in, prompting companies to adjust expectations.

"The whole market between January and March was so overheated," Sichenzia said.

Spear said one factor pointing toward a more sober climate is that aftermarket returns of recent IPOs have been mixed. While some companies have fared well, at least seven companies that went public in May are trading below their IPO price, according to Renaissance Capital data.

"The current environment is forcing companies to choose between taking a lower valuation or potentially trading poorly once they get into the market," Spear said.

Certain trends that drove the IPO boom also appear to have run their course. Spear noted that many companies in prior months seized opportunities brought about by the pandemic, which favored technology companies and other businesses that catered to the stay-at-home phenomenon.

Many companies that are eyeing a post-pandemic rebound have also already made their moves. Airline operators Sun Country Airlines Inc. and Frontier Group Holdings Inc. went public in early spring in anticipation of recovery as vaccinations increase and travel restrictions loosen.

The pandemic also unleashed a torrent of special-purpose acquisition companies, which don't have operations but raise money in IPOs in order to acquire a private business and take it public. SPACs dramatically slowed in April following increased regulatory scrutiny, though recent weeks show that these vehicles, known as blank-check companies, have resumed filing IPOs.

The coming weeks will reveal more about the health of the IPO market for operating companies.

The week of May 24 contains a modest lineup of four candidates. Two fintech startups, Flywire Corp. and Paymentus Holdings Inc., are expected to raise about $200 million each, while health care apparel company Figs Inc. is eyeing a potential $394 million offering. Online job marketplace Ziprecruiter Inc. is also scheduled on Wednesday for a direct listing, which raises no money.

Plus, a steady flow of companies are continuing to file plans, showing the market is far from dormant. At least 18 more operating businesses have filed IPOs since May 1, mostly from the technology and life sciences sectors. These companies either can or will soon be eligible to launch marketing roadshows, potentially sustaining the IPO market well past Memorial Day.

Certain IPO candidates are also household names, notably Robinhood Inc. The popular trading app filed plans in March confidentially with regulators and is rumored to be making its plans public shortly. Venture-backed personal finance website NerdWallet is also reportedly planning an IPO.

Spear noted that a softening IPO market can also bring out stronger candidates as investors become more discerning.

"We've seen a lot of great companies come out of challenging periods like this because they are forced to have good fundamentals and what investors would deem is a fair valuation," Spear said. "This is a challenging time, but good deals can still get done."

--Editing by Philip Shea.

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