Money-losing food chain Cava showed IPO success. Is it finally time for some tech deals?

By Emily Bary

IPO market showing more encouraging signs, but experts don't expect a massive uptick this year

The market for initial public offerings has been all but frozen since 2021. Could the recent performance of a Mediterranean fast-casual chain offer a glimmer of hope for more deal activity?

Perhaps, according to Renaissance Capital senior data analyst Avery Spear. Shares of CAVA Group Inc. nearly doubled from their IPO price in their first day of trading earlier in June, and they've held up since then. The restaurant company is unprofitable and "more of a growth play," Spear said, "something we'd see more in a normalized IPO market."

"I think that's definitely a positive signal for other growth companies," she continued. "For the broader market, it's a good sign as well."

Read: Cava Group CFO is confident restaurant chain will be profitable -- but she won't say when

The IPO market is closing out the second quarter with more momentum than it had in the beginning, as six IPOs are currently on the schedule for the last week of June, and four of those are expected to rake in upwards of $100 million.

One company that already made its IPO debut this week is GEN Restaurant Group Inc. , and shares of the profitable Korean restaurant chain were rocketing 38% higher Wednesday. GEN raised $43.2 million with its public-market entrance.

See more: IPO market readies for six-deal week, with four expected to raise more than $100 million

Overall, quarterly proceeds could be in the neighborhood of $7 billion, the best haul in six quarters even without counting the $3.8 billion from Johnson & Johnson's (JNJ) spinoff of Kenvue Inc. , according to Renaissance data.

That said, deal count and activity are still well off where they were during the frothier times of 2021.

Of course, it takes more than one successful brand-name IPO to reignite a market. And while Cava had an impressive debut, Spear notes it's not exactly a "perfect bellwether for VC-backed tech" companies, which have been absent from the IPO market since the end of 2021.

She'll be watching to see if chip designer Arm Ltd., which is owned by Japan's SoftBank Group Corp. , ends up going through with a debut later in 2023, in what would be the first major splash for tech in nearly two years. But she's "not expecting a very sharp rebound" in the market, even with Cava's success and the Federal Reserve's decision to pause rate hikes.

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"It depends how well returns hold up in coming weeks," she said. There could be a gradual recovery in the third quarter, with some potential for a more meaningful pickup around the end of the year.

Daniel Klausner, the managing director for public equity advisory at investment bank Houlihan Lokey, agrees that there are some more encouraging signals nowadays, including double-digit gains for the S&P 500 and the Nasdaq Composite Index and a comedown in the CBOE Volatility Index . But he's likewise doubtful that recent trends will "unleash the floodgates."

The buy-side has been more willing to wade into deals this year since many companies that have gone public have had scale and at least a pathway to profitability. IPO sellers and bankers, meanwhile, want to keep the buy side engaged, with the understanding that in a market like this, "if one IPO wobbles, it has the potential to set back the constructive activity we have seen in the IPO market."

"There's a recognition that sellers want to keep this ecosystem going," Klausner said. "It's still going to be a slow 2023."

One positive trend is that companies seem to be more open to conversations about IPO planning, even if those debuts aren't necessarily imminent. He has been involved in more discussions that run the gamut, including with potential issuers looking to talk to IPO advisers or work on closing their books more quickly.

"There are more inbound conversations than we had certainly last year," he said.

-Emily Bary

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07-01-23 1212ET

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