(Bloomberg) -- Arm Holdings Ltd.’s multi-billion dollar initial public offering, which is set to launch in a week, is helping to revive interest in one small, battered corner of the financial market: stakes in companies that are set to go public soon.

Buying interest, or bids for so-called late-stage private stakes, has risen to about $1.4 billion from $1 billion at the depth of the stock market correction last year, according to Rainmaker Securities, which facilitates such transactions. 

“One of the big fear-of-missing-out effects is institutional investors afraid the IPO window is going to reopen, and they won’t be in private” companies beforehand, said Forge Global Holdings Inc.Chief Executive Officer Kelly Rodriques. “We’re in that moment now.”

The premise of pre-offer investments is similar to that of venture capital, but less risky on their proximity to IPO as an exit. It also provides stakes in hotly-pursued IPOs such as Instacart and Klaviyo ahead of their offerings.

But while rising, interest remains subdued. Private companies traded at a discount to their last fundraising round of about 58% in July, and while that is down from 61% in May, it is up from 52% in June, according to private market trading platform Forge.

That discounted pricing provides an attractive investment opportunity for some investors, although the universe of potential new listings has shrunk dramatically, weeding out weaker candidates.  

“After in essence a two year drought in traditional tech IPOs, Arm sets the stage for a group of very high quality companies to come public in today’s valuation environment,” said Jeremy Abelson, Irving Investors founder and portfolio manager. 

His firm, which traditionally invested in public stocks, recently launched a fund dedicated to pre-IPO investments in tech and consumer companies.   

But for now, the volume of pre-listing stakes on sale has normalized at about $1.8 billion, down from as much as $4 billion last year, Rainmaker said. The return of investors will depend on pricing. 

“Investors are no longer willing to pay gigantic multiples against future cash flows,” said Linqto Inc. President Joseph Endoso. “Those things happened in the last bull market, but I think hard lessons have been learned.” 

The safer bets are sizeable companies with a proven track record of operations, and a clear route to profitability, if they aren’t already there. With that as the new barrier for entry, not many of the IPO hopefuls of the last few years would pass muster. 

Software-as-a-service companies, which were all the rage before the market crashed in 2021, have gone through serious pruning. The number of such companies that are still valued at around $2 billion and therefore considered “viable IPO candidates” has gone down from hundreds to just tens, according to Rainmaker Securities managing director Greg Martin. 

“Below $1 billion market cap, you’re just out there as a public company with no liquidity,” he said. “You have all the negatives of being a public company, quarterly reporting, information sharing and public company costs, without the liquidity benefits. This new bar will impact the flow of IPOs going forward.” 

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