Earlier this month, a flurry of IPOs successfully closed on an aggregate $1.17 billion in proceeds — according to a recent Reuters article — with several more companies waiting in the wings. This is great news for capital markets lawyers, coming off the slowest year in more than two decades in 2022.
A Pitchbook article from Friday has more stats — but isn’t quite as optimistic. The article says that there are a few reasons why deals are currently smaller and more difficult to come by:
– Macroeconomic volatility: With inflation, uncertainty about the future of interest rates and geopolitical turmoil, PE and VC firms aren’t willing to let their pre-IPO assets go amid the chaos.
– Firms can’t agree on valuations and pricing: It’s a buyer’s market, and the supply side is on strike. Asset managers don’t want to let go of their trophy assets—strong companies they’ve held in their portfolio for a long time and have helped scale—in an environment where they won’t get the biggest bang for their buck.
– The specter of recession: An impending and enduring recession is the most “vexing” ingredient for IPOs, Ethridge said. In a downturn, investors tend to stick with what they’re comfortable with: businesses with a balance sheet strong enough to survive, according to Kyle Walters, associate PE analyst at PitchBook. This also means they move away from riskier, higher-growth options in IPOs.
So, if you typically fill your plate with IPOs, can you count on a bounce-back later this year? Of course it is somewhat industry-dependent — a recent CNBC article shares a few that are looking more rosy. For the broader market dynamics, the folks that Pitchbook talked to were all over the map — with some predicting an uptick in late 2023 and others thinking it could be years away. They pointed to a few signs that will be necessary precursors to a hot market:
Whether it’s six months or six years, a few (or all) of the stars need to align for IPOs to round out their comeback story. For one thing, the macroeconomic environment needs to recover. There is a positive correlation between public stock market performance and public listings, so if stocks climb back up, so will IPO activity.
Also, buyers and sellers need to come to a pricing agreement. In short, sellers will have to make concessions, but this is unlikely.
“The buy-side is wearing the pants right now, and that will continue,” Ethridge said.
A final factor is for a game-changer company to come onto the scene. For example, a company goes public, prompting similar competitors to flock to the public market. Ethridge said he’s been eyeing a promising tech company for the role.
– Liz Dunshee, CompensationStandards.com, February 28, 2023