Back to basics: a shift in investment approach
As 2023 draws to a close, investors are recalibrating their strategies for 2024. One resounding theme for the Technology, Media and Telecom (TMT) sectors are a return to basics. There's a heightened focus on fundamental investment principles – scrutinizing total addressable market (TAM) and competitive moats, placing emphasis on the quality of revenue, delving into unit economics and looking for management teams with a strong execution track record.
“As they look forward to 2024, investors are thinking about how they are going to deploy capital,” says Jesse Chasse, Head of Technology Equity Capital Markets. “We continue to hear that investors are very much adopting a ‘back to basics’ approach to investing. That means focusing on a company’s total addressable market and on the quality of revenue, efficiency and margins – not just growth.”
Strategizing for the IPO battleground
Private companies attending this year’s RBC TIMT Conference are keenly aware of the increased scrutiny they may face during an IPO. The primary goal for many is to understand the key challenges they might encounter when going public.
The importance of early preparation should not be underestimated, as it allows companies to proactively address investor skepticism, craft effective investment narratives, and navigate the IPO process with confidence.
“I think the core goal of many private companies has been to understand the key battlegrounds when going public, and how to manage an IPO whether it's 12 or 24 months away,” says Chip Wadsworth, Managing Director, Tech Equity Capital Markets.
“There’s also an element of relationship building,” continues Wadsworth. “I think astute management teams realize that IPO windows open and close, probably more than we want them to, But when the IPO market does reopen, it's as much a relationship sale as it is to do with the fundamentals of your business. When it comes down to your IPO roadshow, you should aim for a warm call instead of a cold call.”
The evolving IPO landscape
“As the IPO market continues to heal, it is clear that the IPO playbook from 2020 and 2021 needs to evolve. It is critical for all participants to find the right balance between achieving fair value at IPO and setting companies up for long-term success in the public markets.”
“When you take the most recent signature tech IPOs, questions around their underperformance were really tied to what their objectives were,” says Chasse. “There were actually a lot of positive signs relating to those IPOs. They all saw significant demand, and they all priced at very healthy multiples. The disappointing part has been how those recent IPOs have traded in the aftermarket.”
“One of the things we always talk to when we advise our clients is that any IPO process has to start with a clear conversation around what are your core goals and objectives? Are your core goals and objectives to really maximize fair value at IPO? If so, there’s a playbook for that. If your core objective is to set up a stock that trades well and creates value for pre-IPO holders, but also new investors over time, there's a playbook for that too.”
“The IPO is the wedding, but don't forget about the marriage. It’s important to establish your credibility in the public markets right out of the gate, but it’s also important to be long-term focused.”
Jesse Chasse, Head of Technology Equity Capital Markets
“To some extent,” continues Chasse, “those signature IPOs that priced were over-engineered to solve exclusively for one problem – how do I maximize every dollar at IPO? One of our favorite adages is the IPO is the wedding, but don't forget about the marriage. It’s important to establish your credibility in the public markets right out of the gate, but it’s also important to be long-term focused.”
When will the IPO market re-open?
“The first thing that we are highlighting is the fact that the buy side is open, they want to have multiple conversations,” says Wadsworth. “The second thing is that there are data points out there that indicate there's going to be some movement.”
“But there is also another piece to it. We are very focused on what the RFP cycle looks like. We're definitely seeing the first steps in sponsor-backed businesses having formal dual-track conversations with us around M&A versus IPO. And we're also starting to see some of those bootstrapped or venture-backed businesses have a real formalized bake-off process. So with all those in place, you can actually say in six months, there should be some additional flow. But it's going to take a lot of work to get us there.”
Private equity and M&A in Tech
Finally, when examining drivers and trends, it’s easy to lose sight of the fact that around 40-plus percent of all equity capital markets volume coming from private equity. Looking at prospects going forward, the continuing rise of private equity is another vital piece to the puzzle.
“We've seen a significant increase in sponsor-backed follow-ons, sponsor-backed registered blocks, sponsor-backed unregistered blocks in the last year,” says Wadsworth. “Having that flywheel working in the right direction is only going to enhance opportunities as we go into 2024”.
“We’re also seeing the use of more creative, more forward-thinking tools – margin loans, call options etc. These structures are putting sponsors in a position to find the liquidity to return capital to LPs, and in some instances use that liquidity to fund M&A at their portfolio companies,” says Wadsworth.
“We are all watching M&A closely,” agrees Chasse. “In this cycle, there might be more value to exiting a position through M&A and cashing out up front versus monetizing over time in the public markets, particularly if there's not a big belief that there's going to be massive value appreciation in the near term in the public markets. That’s actually a healthy part of the dialogue we're very comfortable with having as advisers”.
