Due diligence within the context of IPOs involves meticulous investigation into the company seeking to go public. This rigorous scrutiny is designed to ensure that all relevant financials, business operations, legal obligations, and risks are accurately disclosed to potential investors. IntegrityRisk’s in-depth and customized IPO due diligence process is a critical component for companies seeking to go public – and the financial institutions working with them.

2021: The Year that IPOs Will Go Down in History

It’s been about three years since the record-breaking IPO performance that saw more than 3,000 public offerings raise US$627 billion around the globe. Since then, a complex geopolitical landscape combined with unfavorable interest rates and a murky consumer spending outlook has left investors wary, companies uncertain, and the IPO market in disarray, down in 2023 to just about 1,300 IPOs, which raised a mere US$123 billion.

Now, halfway through the first quarter of 2024, financial analysts are anxious to announce an IPO resurgence. One thing is guaranteed – you can expect to continue to hear phrases like “cautiously optimistic” and “reserved expectations” as companies around the globe look for their opportunity to launch the carefully crafted IPOs they’ve been honing and holding, waiting for interest rates to even out and market volatility to abate.

“Globally, moderating inflation and potential 2024 interest rate cuts could attract investors back to IPOs by improving liquidity and return outlooks. However, sustained geopolitical instability may undermine confidence.” EY, Global IPO Trends 2023.

Behind the Numbers: Metrics on IPO Due Diligence in 2023

As is often the case with financial markets, the story behind the numbers is as important as the numbers themselves. Many of the IPOs that contributed to a record-smashing year in 2021 faltered over the subsequent two years, with some notable new entries (WeWork) filing for bankruptcy or dissolution. Another failure has been the concept of SPACs; these blank-check companies were major contributors to 2021’s exuberant performance, raising a record US$172 billion throughout the year. But of the nearly 700 SPACs that launched that year, 40% have already been liquidated, according to data provider Dealogic and reported in Financial News. The US SEC responded by announcing new rules and regulations requiring “enhanced disclosures about conflicts of interest, SPAC sponsor compensation, dilution, and other information that is important to investors in SPAC IPOs and de-SPAC transactions.” According to the release, the new rules require registrants to provide investors with additional information about the target company so they can make “informed voting and investment decisions in connection with a de-SPAC transaction.”

“[These regulations] will help ensure that the rules for SPACs are substantially aligned with those of traditional IPOs, enhancing investor protection through three areas: disclosure, use of projections, and issuer obligations. Taken together, these steps will help protect investors by addressing information asymmetries, misleading information, and conflicts of interest in SPAC and de-SPAC transactions,” said SEC Chair Gary Gensler in the announcement.

Birkenstock’s IPO

By no means are SPACs solely responsible for the market deflation that occurred in the months and years following 2021’s IPO performance. In October 2023, when Birkenstock Holding PLC announced plans to go public, the company’s IPO was considered a shoo-in for success. The shoemaker has, after all, been in the footwear business since 1774 and boasts a following of uber-dedicated, comfort-loving sandal wearers. So how did a company worth more than US$1 billion with an almost cult-like following experience such a miserable showing on October 11, 2023, when Reuters reported Birkenstock stock opened 13% lower than expected at $41 per share on the NYSE (compared to the anticipated $46 per share)? Overvaluation was a key contributor, but there were a couple more hints that further due diligence may have uncovered. For example, investor confidence was shaky as the company’s CEO had never led a public company, and Birkenstock’s plans to expand its China operations did not inspire confidence among financial institutions as tension between the US and China continues to increase.

The three largest IPOs in 2023 – semiconductor firm Arm Holdings, consumer health company Kenvue, and Birkenstock – all saw depressed post-IPO share performance; Birkenstock saw a 13% drop in stock prices, Arm’s stock fell 8% and Kenvue shares dropped 9%, according to analysis from Bloomberg Law.

IPOs are risky by nature, and Sofi has reported that in a “Nasdaq analysis of companies that have gone public since the 1980s, the IPO success rate is about 20%. This means that 80% of companies that go public end up being unprofitable when they make their debut on a stock exchange.” And though market disruptions are unavoidable, undertaking thorough due diligence ahead of a public debut can help reduce the chances of disappointing results or, worse, a class-action shareholder lawsuit.

In a glaring instance of the need for scrupulous due diligence, grocery delivery service Instacart, which became a must-have for many people during the pandemic, is the subject of a shareholder class-action lawsuit after investors claim it “negligently prepared documents for its 2023 initial public offering by misrepresenting its growth potential,” per Law360. The lawsuit against Instacart and several of its executives claims the company “downplayed the amount of competition it faces in the online grocery shopping and delivery market when it filed its registration statement with the U.S. Securities and Exchange Commission prior to its September IPO.”

Instacart’s IPO

Instacart, trading as Maplebear, did not have a smooth IPO; its shares opened at $42, but the company closed its first day of trading at $33.70 and, by the second day of trading, shares had dropped 11% from their launch. MarketWatch reported that two months later, Instacart was one of four stocks still trading below expectations (the other three are referenced above). It remains to be seen how the class action lawsuit, filed in the United States District Court for the Northern District of Columbia, will affect Instacart share prices long term.

No doubt each of these companies, and many others like them, felt well-prepared to enter the public market. The companies and the financial institutions they work with certainly considered factors such as inflation and interest rates, economic health, and geopolitical concerns before going public, which goes to show that every company, no matter its size, must conduct thorough due diligence, and then when its leadership thinks they’ve explored every risk, investigate further. Don’t forget that while the companies are conducting their due diligence, the financial institutions backing them are doing the same.

IPO Due Diligence Can Help Companies Stay Off The List Of Failed IPOs

A running theme among IPO candidates that saw poor opening-day showings is a disparity between what their stock is worth to them and what the public thinks it is worth. Nobody can guarantee a successful IPO, there are just too many variables. However, conducting thorough due diligence ahead of time will certainly increase a company’s chances of staying off the list of failed IPOs. EY offers the following insight:

“IPO candidates looking to go public in 2024 will need to be well-prepared. Key factors to consider are inflation and interest rates, government policies and regulations, recovery of economic activities, geopolitical tensions, and conflicts, ESG agenda, and global supply chain.” All this can be summed up in four words: conduct your IPO due diligence.

2024 Outlook and IPOs to Watch

Financial analysts are largely predicting a “muted” or “subdued” IPO recovery in 2024. Macroeconomic factors such as unemployment and the lingering prospect of recession will continue to impact the IPO market, reports Forbes. Investors will require even more rigorous vetting before spending their money on an unknown. However, there are a few companies that may give investors a chance to release some of the pent-up demand that has been building over the past 18 months of languishing markets. Kim Kardashian’s fashion company, Skims, fintechs Plaid and Chime, social media tech company Discord, and automotive peer-to-peer rental company Turo are all on Forbes’ list of IPOs to watch in 2024. Market watchers are also keeping an eye on Reddit’s highly anticipated public debut.

The market for IPOs has been restless over the last 18 months, with investors and companies anxiously awaiting the right time to go to market. Ongoing geopolitical concerns, such as the war in Ukraine, rising tensions with China, and interest rates and inflation here in the US, have left market players wary. The demand is there, but confidence, especially after several instances of overvaluation leading to IPO disappointments, has not fully rebounded.

Confidence grows with information. Financial institutions considering backing an IPO candidate must conduct meticulous due diligence into the target companies, their executives, and board of directors. This is a critical component of any public listing and plays a fundamental role in the IPO’s success. IntegrityRisk’s exhaustive IPO due diligence research scope and process provide financial institutions with the information they need to help ensure regulatory compliance, confirm the accuracy of the information provided by the company, and thoroughly vet company leadership, structure, and operations.

By Kathryn Mackenzie

Kathryn Mackenzie, Senior Editor, has been a writer and editor for the healthcare, technology, and commodities sectors for the past two decades. Prior to joining IntegrityRisk she worked with publishing giants including Gannett and Knight Ridder to provide thorough coverage of the global pulp and paper commodities markets. Kathryn has won several awards for her feature writing, most recently from the Alaska Press Club for her executive interviews with U.S.-based industry leaders in finance and logistics, and earlier from the National Newspaper Association for her freelance work writing and editing for the association.