The dust is settling after the flurry of activity in 2021, and the IPO market is facing considerable headwinds. The following key themes could dominate equity market headlines in 2022

Going into 2022, the stage was set for a quieter year for IPOs than the buoyant 2021: Inflation worries and the specter of interest rate hikes had led some investors to pull out of equities, as had projections of slower GDP growth globally. Against this background, the events in Ukraine are sending shockwaves through markets. Although IPO activity is set to be more muted as long as the situation lasts, activity will not dry up entirely for 2022—the following factors are also at play:

1. Market volatility

The situation in Ukraine has only further destabilized share prices around the world, while sending energy commodity prices sky high. All of this volatility and uncertainty makes for an unwelcoming environment for IPOs—one that will continue to weigh heavily on global IPO markets until a resolution is reached.

2. The pace of economic growth

Inevitably, the broader economic backdrop will provide IPO markets, and capital markets more generally, with the conditions to flourish—or not. The outlook is mixed. In January 2022, the International Monetary Fund expected global GDP to slow in 2022, to a rate of 4.4 percent, down on the 5.9 percent estimated for 2021.

The COVID-19 pandemic has caused disruptions to the supply chain, which in turn has led to a tough inflationary landscape. There has also been a significant step backward in the interconnectedness of the global economy that has served as a backdrop for growth around the world for decades. How long the disruptions to the global economy and to capital markets are likely to last is still unclear, but some regions—particularly those outside Europe—could possibly see conditions for IPOs improve in Q2 of 2022.

3. Regional variation to return

One chapter of the 2021 IPO story was its universality—every region of the world saw strong growth in new issues, as international markets bounced back in unison from the COVID-19 traumas of 2020. In 2022, however, regional IPO markets look set to come uncoupled and less connected. Although prospects in the US market are relatively upbeat, the European IPO market could see the sharpest drop in issuance, as markets are set to remain inhospitable as a result of the events in Ukraine. Latin American IPO activity slowed markedly in the second half of last year and faces tough headwinds in all-important Brazil. There are also question marks over the Asia-Pacific region, given anxiety about the Chinese economy—though interest in Indian IPOs is growing.

4. Raising the bar

As stock markets begin to cool, IPO investors will naturally become more demanding about the businesses they are asked to back—and the prices they are expected to pay. The disappointing performance of some IPOs in post-listing trading last year will provide pause for thought in this context. Some issuers may feel their IPOs are unlikely to attract the support they would hope for—and they may not relish the tougher questions they will face from investors. In which case, fewer IPOs will make it to the starting line—and those that do will need to be able to provide a robust defense of their value proposition.

5. SPACs to remain

The SEC's interventions in the SPAC market might have been expected to pour cold water on issuance, but while SPAC launches dipped in the third quarter of 2021, they bounced back in Q4. Although demand for SPACs has decreased, there is good reason to be confident that 2022 will see further activity in this area of the market as the instrument has become mainstream, and all the more so given the growing number of non-US SPAC launches. Further regulatory developments might change the story, but for now, SPACs continue to raise money.

6. ESG moves center stage

The climate change agenda and the growing importance of social issues in many markets should play into the hands of businesses with a credible story to tell on environmental, social and governance (ESG) factors. Demand for businesses in sectors such as renewable energy is likely to grow even stronger as investors look for businesses to back during the world's transition to cleaner technologies. And beyond pure plays on the climate, every IPO candidate can expect to be asked about its ESG record.

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