Amidst concerns of further potential economic and market volatility, current discourse into the prospect of a reopening of the equity markets begins with the biggest question facing investors and corporates – can the market continue to broaden on recent gains, and what implications might the rally hold for IPOs?
Market performance primes IPO revival
“As we sit here in late August, looking towards the fall, IPO volumes are actually up 140% this year,” says John Kolz. “Follow-on issuance is up 43%. Converts are up 140%. But those numbers are off an extremely depressed base. The NASDAQ is up 27%, but there's been virtually no tech IPOs. Deal volumes have been decent, but performance thus far has been fair at best. There’s real-time momentum in the markets right now, but what does that mean for rest of the year, and for IPOs specifically?”
“It’s the question we’re asked the most,” affirms Mike Ventura. “If you think of the year-over-year comparisons you’ve listed, most of that deal volume came from a well-defined window in May and June, ahead of corporate blackouts. The market data has investors feeling good. The knock-on effect of the very strong follow-on performance has already led to a few green shoots in the IPO market.”
All eyes on post Labor Day
With several high-profile deals already completed, market observers are now turning their attention to a suite of anticipated stock offerings post Labor Day. Expectations are high that these post-holiday transactions will all price well and trade strongly, injecting fresh optimism into otherwise muted IPO markets.
While some fear too much pressure has been placed solely on these deals to spur a revival in the IPO market, most remain optimistic, noting robust investor demand for quality offerings. The stakes are high, agrees Ventura, but if these deals succeed, the markets could rapidly regain the momentum needed for a sustained reopening. “They will be the final breadcrumbs on a long trail towards the IPO markets fully reopening. We’re actively advising our clients to be prepared for that. Being nimble in this window-driven market will win the day.”
Clearly, these post Labor Day IPOs are carrying added weight thanks to their sheer scale and hype. But for Joe Passaro, floating them well represents only half the battle. “It’s not just a question of these deals getting done. It’s also a question of who shows up. Can the market set these companies up not just for near-term success in trading day one, but for long-term success as public companies with a set of really strong shareholders.”
Optionality unlocks new opportunities
While a new wave of IPOs garner headlines, a deeper equity capital markets story lies within the diverse financing options now emerging for issuers, allowing companies to find more tailored pathways to capital. “Between convertibles, block trades, private placements, ATMs, equity margin loans, and covered calls, there seems to be a solution that can fit every issuing client’s needs,” says Kolz. “Interestingly for us at RBC, this is precisely how we've built our business – to be big enough to offer everything a client needs, but also creative and nimble.”
“We’re in a period right now where many of the historic norms around how to issue, when to issue, and what to issue are all being challenged”, agrees Ventura. “There’s also a far higher degree of understanding across the management teams and boards that we deal with that encourages our clients to embrace more creative solutions when they find an issuance window that’s open.”
Aligning the signals
While optimistic about the potential for an IPO rebound and the breadth of issuance optionality on offer, our experts caution that the market still feels ‘delicate’ given an unsettled macroeconomic environment. All agree the rest of the year could bring a surge of new offerings, if conditions align just right. But other scenarios appear equally plausible. When pressed for near-term predictions, each provides a prognosis typical of these volatile times.
Kolz believes private equity and venture capital firms will feel the pressure to return money to investors in the second half of 2023, even if market conditions are not perfect. “This should lead to a steady uptick in volume,” says Kolz. “We’ll likely see a steady drumbeat of activity throughout the rest of 2023, reaching a peak in early to mid-2024. Critically, this outlook depends on investors seeking to return primary capital to companies raising funds for growth-driving initiatives like M&A, CapEx, or business expansion.”
Ventura also sees a busy near-term outlook from a follow-on perspective. “Simultaneously, I also expect to see those highly anticipated, high-profile post Labor Day IPOs launch and price well. However, while these deals will likely perform strongly, the next crop of IPO candidates may not yet be ready to launch on their heels. This means Q1 2024 could see a very busy rush of IPOs, as issuers will want to be closer to the front of the line versus later in terms of timing. Issuers eyeing IPOs will want to be off to the races right away in January to claim pole position amidst the deployment of fresh capital.”
Looking ahead, Passaro observes that investor sentiment has markedly improved in 2023 as markets stabilized and interest rate/inflation outlooks became clearer, making investors more willing to take risks and deploy capital back into equities over the rest of the year. “Clearly, IPOs remain at the far end of that right now. I think the first place most investors are willing to deploy capital is in the follow-on market. But overall, I would say we are returning to a place where investors can now think about making investments over a longer duration. In 2022, it felt like investors were thinking shorter-term. Now it feels like we're returning to a place where investors can make longer term bets on cyclical winners over the next three to five years.”
