After a rambunctious year for public listings, an evolving market now threatens to end the good times. Both SPACs and traditional IPOs have given underwhelming stock market performances, and inflation is leading to interest rate hikes that could weigh on valuations.

But there are still plenty of reasons to believe that IPO activity will be strong in 2022. For starters, there's an abundance of IPO-ready companies thanks to a decade-long buildup of venture-backed startups.

Nearly 700 US VC-backed companies are valued at more than $630.8 million, the median exit value of a 2021 public listing, according to PitchBook data. That group is far larger than the 220-plus IPOs in 2021, leaving the market with plenty of potential candidates.

"Eventually all that money that comes in has to come out," said Cameron Stanfill, a venture capital analyst at PitchBook who recently predicted that more VC-backed companies will go public in 2022 than in 2021.
With few enterprise giants large enough to acquire them, multi-billion-dollar companies typically have no option but to go public eventually, Stanfill added. And as investors' portfolios swell with these high-value holdings, they face increased pressure to secure an exit that returns value to LPs.

Upcoming US mega-IPOs include social media platform Reddit and yogurt maker Chobani. IPO plans are also reportedly in the works for Porsche, Indian ecommerce giant Flipkart, precision medicine company Tempus Labs and Indonesia's GoTo Group.

While hundreds of companies may be ready for the public stage, private markets are more accommodating than ever to late-stage companies. In the first nine months of 2021, mega-rounds of $100 million or more accounted for more than half of total VC investment, according to the Q3 PitchBook-NVCA Venture Monitor. VC firms also raised a record $96 billion during the period, led by growth in the largest funds.

With so much capital flowing from VC investors, companies will find that IPO timelines can be extended easily if market conditions aren't ideal.

"I think you're going to see a gradual softening of the market," said Ali Mitchell, a partner at EQT Ventures. "There's an enormous store of companies, but 2021 has been a peak."

Another potential damper on the IPO market is inflation and therefore interest rate increases, which put pressure on stock prices. How big of an effect these factors will have on the IPO market depends on the severity of inflation and the response of central banks. The stock market took the Federal Reserve's December announcement of 2022 rate hikes in stride, an indication that the move was anticipated.

High valuation multiples for tech companies have made public listings attractive to startups, but they also create a risk of volatile price swings. This risk became apparent in the recent underperformance of newly public companies, which could weigh on the valuations of future issuers.

Blank-check companies, meanwhile, are entering a kind of midlife crisis that could deliver a steady flow of new public listings.

SPAC formation peaked in the first quarter of 2021 with 317 IPOs, which means a large share of the market is approaching its first birthday. SPACs typically have two years to execute a deal or return the money to shareholders, so there will be intense pressure to get deals done throughout 2022.

The structure of SPACs could help them to execute deals should volatile conditions arise. Companies going public through SPAC mergers agree to a price for their shares and other terms in advance, whereas IPO pricing is dependent on future market conditions.

However, investor sentiment for SPACs has declined following the poor performance of many companies post-merger. Additionally, high redemption rates show a wariness among SPAC shareholders that can increase reliance on alternative financing, including debt.

As blank-check companies face more scrutiny, a key question remains: Will they bow under the pressure, or will the incentive to strike deals serve as an engine of public listing activity in 2022?

Related read: Six charts that put the IPO market into perspective

Featured image by Andriy Onufriyenko/Getty Images

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