University of Florida Finance Professor and IPO expert Jay Ritter joins Yahoo Finance Live to discuss the state of the IPO market, how it's evolved in 2022, and what held many back.

Video Transcript

SEANA SMITH: It has been a brutal year for the IPO market with 2022 marking the slowest year on record since 2008. That's according to research from the University of Florida. And proceeds have fallen off a cliff to the lowest level that we've seen in more than 30 years.

Here to break it down, what exactly happened, what it signals for the new year, we want to bring in Jay Ritter, University of Florida finance professor and IPO expert. Jay, it's great to have you back here on Yahoo Finance. So the decline, the year over year decline, has been pretty striking here for everyone that's been following the IPO market closely. I guess, what do you make of the huge drop that we have seen in activity this year?

JAY RITTER: Day has turned to night. Last year was the biggest boom in the IPO market since 2000, and things have fallen off a cliff this year. The stock market is down, but interest rates are up. But even more importantly, the valuations on growth companies collapsed. A major reset, and that affected lots of IPOs. Last year, that was one of the things driving the big activity. The high valuations a lot of the companies were able to get told them now is a great time to go public. And with this reset in valuations, lots of them said, well, we missed the window last year.

JARED BLIKRE: Well, I'm looking at one of your stats here. We had the lowest number of IPOs in 2022 in any year since 1979. That was another year of high inflation. That was during the Volcker Fed. We could say a lot about that. But just wondering, how much of this is because of the business cycle? And I guess the contrary, the flip side of that, do you expect once the Fed gets a handle on monetary policy, it gets a handle on inflation, can we go back to the norm? What does that new norm look like?

JAY RITTER: 2008 actually had fewer IPOs than this year. But actually, more money was raised that year. The IPO market is not super sensitive to business cycles. For instance, in the last decade, about 30% of all of the IPOs have been biotech companies. And they're not going to have revenue for five or 10 years, if ever, from product sales. So they're not very sensitive to business cycles.

But the IPO market is quite sensitive to the ups and downs of the stock market. And that definitely was a major damper on the IPO market this year.

SEANA SMITH: And Jay, what about the focus just from an investor perspective, or really, from the big banks, just in terms of growth and profitability? That's what people are more focused on now, rather than the growth at all costs, which have been the strategy that had been working, I guess, at least from investors' eyes, over the past several years.

JAY RITTER: Yeah, last year in particular, 2021, the low interest rates led to a situation where investors were looking at growing companies that were losing money and not focusing on the short-term. They were thinking about future potential profitability, but basically, investors got overoptimistic. There was just too much money chasing, a lot of these companies, whether it was in public markets or especially in private markets. Venture capitalists just had so much money to throw at these companies. And that led to the escalation of valuations to unsustainable levels.

It wasn't as bad as it was back in the internet bubble of '99 and 2000. But in retrospect, 2021 was approaching those levels in terms of the optimistic valuations being put on a lot of young money losing growth companies.

JARED BLIKRE: We saw this year almost the death knell of the SPAC market, that Special Purpose Acquisition Companies. This was maybe a loophole, an area of the law where they could skirt certain requirements in terms of forward disclosures, or they were limited by the IPO market in terms of the forward disclosures they could make. And now that loophole has been closed. We haven't seen a lot of activity in SPACs, almost nothing this year. Wondering if that chapter is closed on this market or if you expect a resurgence.

JAY RITTER: Well, it's temporarily closed. But this year, 101 mergers occurred, where a private company did go public by merging with a SPAC. And that's the second largest number ever. Only the previous year, 2021, had seen more than that. But all of the trends are down. Way fewer SPAC IPOs went public this year. Lots of the SPACs that went public the last two years that had not found a deal yet or not completed a merger are instead liquidating. And in fact, this month, before some tax law changes, there's a rush to liquidate. Already, 80 SPACs have said we're giving money back to investors. We're giving up on trying to find a merger partner.

JARED BLIKRE: All right, we got to leave it there, but did you have one more-- we're going to leave it there. Thank you for that, Jay Ritter.