IPO Boutique Brief: Frustrations felt for ECM investors

The stock market last peaked in January of 2022 with the SPY touching an intraday high of 479.98. But since then, its been nothing but frustrations and fears. Every rally seemingly met with a rate hike.

The gyrations have had more impact than just sour returns in the stock market — it has frozen equity capital markets for roughly 16 months and counting.

The IPO market has seen extremely limited deal flow since November 2021.  In the 16 months beginning December 2021 to now, there has been only 31 tier-0ne (we classify as raising $40m or greater) IPOs to come to market — SPACs excluded.  This followed IPO counts of 328 and 189 in 2021 and 2020, respectively.

As a research and commentary service that values our clients, we have many direct conversations with our base about market rumblings, ECM forecasts and life in general.  One long-time client vented to us:

“I thought 2022 was the worst syndicate year, how could 2023 try to surpass that!”

The ECM player isn’t wrong and his displeasure is shared by many in the industry. As we end the first quarter of 2023, we decided to get answers about the state of the IPO and Secondary market and what we should expect for the rest of the calendar year from an investment banker at a bulge-bracket firm.

Regarding the calendar, he says to “not expect a hockey-stick growth in IPO volumes as we saw post-Covid”.  There is a backlog but many of the valuations are not currently coming down as much as one would expect. Companies that are currently private have enough capital or have raised satisfactory capital with strategic investors to get them through this period.  At his particular firm, there is an ample amount of “table-setting and preparing” for when the window does open.

The window is the key question. The thoughts echoed from the investment banker was that the current “assumption” is that the Fed is going to pivot earlier than expected which makes the recent market volatility (regional banks) “not as dire as a situation”. On the flip side, the banker says that investors are staying disciplined as well in the current market backdrop. “Hedge funds are flush with cash and are discerning every transaction”.

The banker also emphasized that he sees convertible bonds becoming a “bigger player” in the near-term future as this transaction benefits in an elevated rate environment.

As for our two cents on the matter: Companies that are well-capitalized and can stay private longer certainly have an advantage. However, the “older” unicorns will have to make a decision soon. Significant capital has been tied up in companies that missed the 2021 window. It is our opinion that when/if the Fed pivots…it will be a signal to equity capital markets that the storm has passed.

It may not mean that new broader market highs are immediately on the way…but it could mean meaningful activity for the space is just around the corner.