Sep 24, 2022 - Economy

Why big IPOs are still happening

Illustration of advertisement on a telephone pole with ripped off tabs. The ad has “For Sale IPO"

Illustration: Eniola Odetunde/Axios

Very few companies would voluntarily try to go public in the current stock market. Yet two multi-billion-dollar household names, both of them profitable, are planning blockbuster IPOs right now.

Why it matters: The IPO market has flipped from favoring sellers to favoring buyers. In the case of Porsche and Instacart, that could be exactly what the companies' major shareholders are looking for.

The big picture: Normally, companies going public try to raise as much money as possible at as high a valuation as possible. But that's not really what's going on in either of these cases.

  • Instacart is profitable, it has already raised money at a $39 billion valuation in 2021, and it has $1 billion of cash in the bank. It's likely to raise very little money in its IPO, and most of the shares for sale will be coming from employees.
  • Porsche AG, the carmaker that's going public, is a subsidiary of Volkswagen, which in turn is controlled by Porsche SE, the investment vehicle of the Porsche-Piëch family. In this deal, the family is buying, rather than selling, a 25% voting stake in its eponymous marque, and is borrowing an eye-watering €7.9 billion to do so. They couldn't afford a much higher price.

Between the lines: Volkswagen shareholders will receive a special dividend of about $9 billion in 2023. While long-term investors like the Porsche family and Qatar's sovereign wealth fund are putting new money into the IPO, most rank-and-file shareholders will actually be taking money out.

Instacart's ultimate owners — the investors in the VC funds who poured $2.7 billion into the company from 2012 onwards — will also like to see a clear public valuation for their stake.

  • Many of those investors — foundations, endowments, and the like — allocate a set percentage of their assets to venture capital. When their stock and bond portfolios fall, as they have done in recent months, VC can look overweight, making it harder for them to invest more in the asset class.
  • If Instacart's public valuation is lower than its most recent private valuation, as seems likely, then that will reduce the value of the investors' stakes, possibly allowing them to allocate more money to their favored VC funds.

The bottom line: If an IPO price is low, then that just means there's more potential for stock price appreciation. That can be very attractive to long-term investors.

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