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Weekly Market Analysis - The Reopening of the US IPO Window
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IPO Launches to be Measured
With a successful new tech offering this week, public markets have unofficially reopened to new issues. We do not expect another IPO boom. Instead, we should see a more measured pace of new issues with a bias towards quality and profitable firms that do choose to go public.
High-Profile Listings to set the Tone for 2024
High-profile listings this year will likely set the tone for the 2024 IPO pipeline. Among US deals raising over $300 million tracked by Bloomberg, new listings are up 21% on average since their debuts this year. This is an encouraging first step for IPO hopefuls.
Current Slate Provides Good Momentum
The current slate of pending IPOs has the potential to provide a bit of momentum to a tech universe that has been relatively starved of good news beyond the biggest public stocks. Among late-stage IPO hopefuls are firms engaged in fintech and payments infrastructure, cyber security, aerospace, artificial intelligence, internet retail, logistics, marketing and education technology.
Summary
One can imagine venture capitalists and investment bankers holding their collective breath this past week. Excluding biotechs, only 75 US companies with a combined value of $11 billion have gone public in 2023. While this mimics the pace of new issues at this point last year, IPO deal flow is down over 90% relative to 2021.
That’s why this week’s highly anticipated market debut of a large semiconductor design firm may mark a restart of IPO issuance over the coming quarters. High-profile listings this year will likely set the tone for the 2024 IPO pipeline. While a narrow rally in mega-cap tech stocks has propelled passive large-cap indices higher this year, the Russell 2000 remains 25% off its highs. In our view, public valuations in the small cap space serve as a reasonable proxy for late-stage private firms. This implies more palatable valuations for new investors via IPOs.
Portfolio considerations
The reopening of the IPO market may provide some new data to tech investors relatively starved of good news. For investors, the S&P 600 index trades at roughly 14x, down from over 20x in mid-2021. Small cap price to book ratios have declined by 33% over that time period. In our view, public valuations in the small cap space serve as a reasonable proxy for late-stage private firms. This implies more palatable valuations for new investors via IPOs.
Source: Bloomberg, September 5, 2023.
IPO Launches to be Measured
This week’s highly anticipated market debut of a large semiconductor design firm may mark a restart of IPO issuance over the coming quarters. A ready pipeline of private firms may now attempt to take advantage of this quieter period in markets to raise capital, providing liquidity for anxious investors.
The calmness that allowed the IPO window to crack open follows a period of heightened market volatility. Aggressive Fed tightening, an uncertain inflationary and economic backdrop, the poor performance of unprofitable firms and a war in eastern Europe have been more than enough to keep late-stage private companies from seeking public listings.
Consistent with the quality theme we’ve pursued in our portfolio guidance, the key to accessing capital markets may be a combination of realistic pricing, profitability and demonstratable growth prospects. While the IPO tap appears to be opening, we expect only a modest rate of IPO issuance in the near-term. The equity market bounce from October’s lows has moved investors away from their complete bearishness, though we are far from normal enthusiasm as there are natural barriers to a new wave of IPOs. As financing costs remain high and volatile, IPO pricing will be well below 2021 levels.
High-Profile Listings to set the Tone for 2024
High-profile listings this year will likely set the tone for the 2024 IPO pipeline. Among US deals raising over $300 million, shares of newly listed companies are up 21% on average since their debuts this year. This is an encouraging first step for IPO hopefuls.
While market-cap weighted indexing and financial media leave the impression that most IPOs are successful, the average IPO does not outperform over the medium term. Given this mixed history of post-IPO performance, despite some recent successful IPOs, we are unlikely to see a true wave of IPOs until the highest profile unicorns choose to take the public stage.
Current Slate Provides Good Momentum
As of July 28, there were an estimated 726 “unicorn” companies in the US. These represents all of the privately-held startup companies that achieve a $1 billion post-money valuation in a private round of financing. And of these, Pitchbook estimates that the current backlog of companies that would have exited via IPO under normal conditions is over 200. Among these late-stage IPO hopefuls are firms engaged in fintech and payments infrastructure, cyber security, aerospace, artificial intelligence, internet retail, logistics, marketing and education technology.
Realistic re-valuations of later stage venture backed companies is a necessity for the return of a healthy IPO market. The average unicorn last raised capital 17 months ago, at the height of the free-money mania. Many of these companies are running through their cash reserves and will either need to go public in order to generate liquidity or raise another private round of financing at major discounts to peak values. Therefore, while the pipeline of potential tech IPOs is quite deep, the willingness of those companies to accept current public market valuations is still unknown.
As of this week, only two US unicorns have filed an S-1 to go public. Many late-stage private company CEOs and investors will be watching these debuts in the coming weeks.
