Banks Ran Their Safest IPO Playbooks This Year. Investors Say It Backfired.

Some of the criticism has centered on one of the most delicate parts of the IPO process: which mutual funds, asset managers and hedge funds get to buy stock in the offering. For Instacart, Birkenstock and software firm Klaviyo, bankers allocated most shares across a relatively small set of investors in the deals, according to people briefed on the allocation process.

Companies doing some of the deals, particularly Instacart and Klaviyo, sold relatively few shares overall, too, because they didn't need new cash and didn't want to sell too many shares at discounted prices. That meant there wasn’t enough stock to go around in the IPO for smaller investors that would otherwise look to buy more stock after it begins trading, according to several investors and bankers who work on tech deals.

To understand why, consider the psychology of IPOs: For the most part, investors remain interested only if the stock keeps going up. “Once the momentum comes out of the stock, those investors [who got small stock allocations] don’t have enough skin in the game to top up or fill up,” said Mark Schwartz, who leads Ernst & Young’s IPO capital markets practice.

Banks have long faced criticism for doling out shares in IPOs to their favored clients. Another newer trend is to use cornerstone investors, a practice companies started a few years ago in which they sign up blue-chip investors ahead of time and market those investors’ commitments in their IPO filings to ensure they have enough demand for the stock. Goldman Sachs, which led the Instacart, Birkenstock and Klaviyo IPOs, deployed the strategy this fall.

Alex Wellins, co-founder and managing partner of investor relations advisory firm The Blueshirt Group, said he has heard “unanticipated pushback” regarding the heavy use of cornerstone investors in recent deals from a few funds. “An unintended negative consequence of that is that some investors feel that they can’t get a meaningful enough allocation, so they are waiting to see how things trade before making a move,” Wellins said.

Overall in the IPO, Instacart sold about 80% of the shares in its listing to 25 investors, a somewhat higher concentration than usual, people briefed on the deal said. Roughly one-third of the investors who put in orders to buy stock in the IPO got nothing. Marketing tech firm Klaviyo, which also went public in September, had a similarly top-heavy allocation, another person familiar with the matter said. Klaviyo dipped below its IPO price for about a week in October but has recently recovered. It allocated nearly a fifth of the stock it sold to cornerstone investors AllianceBernstein and BlackRock.

Birkenstock, a private equity–backed casual shoe company, was even more top-heavy with its share allocation. It sold 90% of the shares in its listing to 25 investors, a person briefed on the deal said. It pre-committed one-fifth of the roughly $1.5 billion it raised in the listing to cornerstone investors Norges Bank and Durable Capital Partners. Birkenstock fell below its $46-per-share IPO price on the first day of trading and hasn’t closed above that level since.

One fund manager whose firm was allotted a small number of shares in the Instacart IPO compared investment managers’ lack of interest in buying stock after the listing to a “buyers’ strike” after larger investors that earned big pre-commitments crowded them out. Smaller shareholders didn’t have big enough stakes in Instacart to keep buying once the price started going down, he said.

Some bankers close to the deals disagree that allocation decisions had much impact on stock performances. The listings overlapped with a broader market selloff sparked by the Federal Reserve signaling it would keep interest rates high for a longer period of time. The yield on 10-year Treasuries was less than 4.5% when Arm, Instacart and Klaviyo went public in September. It shot over 5% by mid-October before coming back down last week. The recent IPO stocks have fared better over the past several days as markets have begun anticipating a lower likelihood of another Fed rate hike.

Each of the companies that listed publicly faced other headwinds. Instacart’s and Arm’s sales growth has been slowing. Klaviyo faced comparisons to other struggling marketing tech businesses. Investors groused about the high price of Birkenstock shares.

Bankers and other IPO advisers expect few, if any, significant IPOs before the end of the year. Rubrik, a closely watched venture-backed software firm that has been preparing to list publicly, tentatively pushed back plans to early next year, people familiar with the matter said. IPO advisers say next year will also likely be sparse. They don’t expect interest rates to fall sharply, and they expect the stock market to become choppier around next November’s presidential election.

Jon Redmond, a tech investor at hedge fund Discovery Capital Management, said at an investor conference in New York last month that recent IPOs’ performance has been a negative sign. He added that Birkstenstock’s listing, the last of the four, was the “nail in the coffin for growth IPOs this year.”