Evening Brief – 10.13.23
Improving Appetite for IPOs
The IPO market serves a critical role in directing both private markets and investors. While activity virtually ceased in 2022, the market has shown indications of revival in 2023.
Only 71 US IPOs raised $7.7 billion in 2022, a stark contrast to the previous year record, when 397 offers raised an astonishing $142.4 billion. In comparison, the IPO market has regained some of its momentum in 2023, with 78 IPOs raising $16.6 billion so far, according to a blogpost by Evergreen Gavekal.
Historically, 150-200 firms have gone public each year, noted Evergreen, implying that the IPO market still has a long way to go before reverting to a more standard level.
Nonetheless, according to a new Goldman Sachs survey, the mood for IPOs is improving. Over half of those polled in the investment bank’s Bi-Annual Equity Capital Markets Survey expressed a “high-risk appetite” for the rest of the year and the first quarter of 2024.
The September survey comprised mutual funds, hedge funds, family offices, pensions, crossover funds, and sovereign wealth funds. While 46% believe the recession forecast for this year and the first quarter of 2024 is still uncertain, 41% anticipate a soft landing.
At the same time, Pitchbook’s VC-backed IPO Index indicates a strong year-to-date return for newly public companies, while the PE-Backed IPO Index has seen a significant increase in recent weeks. In comparison, the SPAC Index is down 3.8% year to date.
The concern is whether more late-stage investors will be ready to take private companies public at depressed valuations. According to the Goldman survey, when accessing new IPO opportunities, a 15-20% discount to publicly traded peers is reasonable. However, based on current trading performance, around 43% of respondents believe current public market valuations remain high.
“The last 18 months have been challenging from a macro perspective,” said Lizzie Reed, global head of the Goldman equity syndicate desk, “but the continuation of opportunistic primary raises, secondary monetization from sponsors and corporate holdings — plus an uptick in convertible offerings — have begun to meaningfully shift investor sentiment and overall market health.”
The IPO market has clearly gained traction, and all indications point to a steadier flow of private-to-public market transactions in 2024, which would be a good development for private markets. While enthusiasm is on the rise, investors must remain cautious as the long climb to a reinvigorated IPO market in 2024 continues.