Equity Capital Markets Update

When will IPOs return?

Aside from the pricing of Corebridge Financial’s $1.7 billion IPO in September and TPG’s $1.1 billion IPO in January, no additional US IPOs greater than $1 billion priced in 2022. This compares to 26 IPOs greater than $1 billion for 2021 YTD.

It is too early to predict when a meaningful uptick in IPO activity will occur. With volatility remaining elevated due to persistent market and macro challenges, investor confidence has continued to fluctuate. The reset in corporate valuations has also discouraged companies from pursuing public listings. As a result, the US IPO market, which has shown few signs of life heading into the final stretch of 2022, has yet to normalize. A reversion to historical issuance levels may not occur until sometime in 2023 or beyond when conditions necessary for a meaningful recovery emerge.

The IPO market has historically rebounded “quickly” and robustly following retrenchments

We reviewed three prior periods of heightened volatility and subsequent new-issue market retrenchments and recoveries over the past 25 years. The precedent sample periods include:

• The Dot-com Crash in the early 2000s
• The Global Financial Crisis of 2007–2009
• The Global Pandemic that began in early 2020

Our analysis provides context around the extent of today’s drought in IPO activity compared to prior periods of economic uncertainty and contraction. We have identified a number of critical factors, events and market catalysts that tend to occur prior to a recovery in IPO activity. Below is a chart highlighting the three largest spikes in volatility this century:

Source: S&P Capital IQ.
2022 data is as of October 31, 2022.

Case studies

The Dot-com Crash

The Dot-com Crash in the early 2000s was generally caused by speculation in technology and internet-based startups, many of which ultimately did not have viable business models. Equity research analysts and other market participants focused on inaccurate or ultimately misleading metrics rather than fundamental company analysis on financial statement line items or other predictive key performance indicators. Because these businesses were predominantly early-stage, high-growth ventures with minimal cash flows, they relied heavily on equity funding in the form of venture and IPO capital.

The Nasdaq declined 75% from 2000 through 2002 and many internet and technology companies declared bankruptcy and faced liquidation. The retrenchment in IPO activity began in H1 2001 and lasted nearly two years. During this period, the VIX averaged 26 and reached a high of 45 in August 2002. Consequently, IPO volumes fell 92%, from $50 billion in H1 2001 to $4 billion in H1 2003.

The recovery in the IPO market first gained footing in H2 2003, two years after the initial slowdown. Over the two-year recovery period, the average VIX level dropped to 18, which is significantly more conducive for IPO activity. The Federal Reserve lowered interest rates from 6.50% in 2000 to 1.00% in 2003, with yields on 10-year US government treasuries falling nearly 400 basis points. In mid-2003, with a more favorable market backdrop, easier access to money and an improving geopolitical backdrop once tensions eased following the aftermath of the September 11 attacks, the IPO market began to normalize. Volumes increased to $25 billion in H2 2003 from $4 billion in the six months prior.

Source: Dealogic.
Note: Market IPO data includes SEC registered offerings $30m+, excludes BDCs and SPACs.

The Global Financial Crisis

We refer to the Global Financial Crisis as the period of extreme stress in the global financial markets beginning with the subprime lending crisis that began in late 2007 and extending through mid-2009.  Access to liquidity and credit concerns spread rapidly across the financial markets, causing a recession in the US and a steep decline in global trade and investment. A recession in most advanced and other economies followed, spurring a global banking and sovereign debt crisis around the world.

The retrenchment in IPO activity began in early 2008 and lasted approximately 18 months. With the S&P 500 losing about half of its value, the US was undeniably in bear market territory, and investors adopted risk-averse strategies. IPO volumes dropped from $28 billion in H2 2007 to $1 billion in H2 2008.

The 2009 recovery in the stock market relied heavily on extraordinary accommodative measures by governments and central banks around the world, which in turn encouraged the re-opening of the new-issue market. The bear market of the Global Financial Crisis began to reverse course in H1 2009, with the S&P 500 trading up more than 30% by mid-May 2009 and over 60% by the end of 2009. The combined efficacy of aggressive fiscal and monetary policies fostered a period of prolonged growth around the globe. The US IPO market subsequently normalized, with volumes increasing to $34 billion in H2 2009 from $1 billion in the six months prior.

Source: Dealogic.
Note: IPO data includes SEC registered offerings $30m+, excludes BDCs and SPACs

The Global Pandemic

As 2020 began, the IPO market was performing well following 2019. Despite various headwinds, including China's trade dispute with the US and Brexit uncertainties, investor appetite for IPOs was strong, particularly in high-growth sectors such as technology. However, the onset of COVID-19 and the corresponding economic uncertainty roiled markets, halted IPO issuance and drove the VIX to an all-time high of 83. The virus posed unprecedented challenges for all companies that needed to educate Wall Street on the impact of the pandemic to their business models and forward projections. The IPO market effectively closed in March and April 2020, typically a robust time for issuance due to the availability of most recent full-year audits.

By May 2020, the IPO market began to thaw. Issuers, particularly those that benefitted from market and lifestyle changes driven by the pandemic, took advantage of “cheap money” as the Federal Reserve lowered interest rates to effectively 0% by April 2020. Investment banks and fund managers adapted the IPO process to the new environment with shorter virtual roadshows and extensive pre-marketing. Despite tremendous uncertainty about health concerns, business prospects and predictability of results, among other things, markets began to look beyond the pandemic and focus on the longer-term prospects of businesses. The VIX fell from its March peak to 31 in June 2020. IPO volumes spiked to $34 billion by Q3 2020. While the impact of COVID-19 on society and business evolved significantly over the next several years, the new-issue market largely recovered within 2 to 3 quarters following the initial outbreak.

Source: Dealogic.
Note: IPO data includes SEC registered offerings $30m+, excludes BDCs and SPACs 

Key takeaways

IPO market retrenchments are unfortunately not without precedent. Issuers and investors alike have faced similar slowdowns in the past, with history suggesting renewed appetite for IPOs may return in the not-too-distant future. 

While prior outcomes can only be used as data points and may not be particularly predictive of future recoveries, the key takeaway from the case studies presented here and others like them over the past century is that the new-issue market could return when volatile conditions moderate and confidence/risk appetite returns to the investor community. Many of the factors that fueled prior IPO market recoveries were driven primarily by external influences, i.e., events and catalysts that are generally beyond the control of corporate management teams. Using the past as a guide, potential drivers that could improve today’s broader market conditions and in turn the new-issue environment include: (i) inflation peaking and beginning to trace back to target levels, (ii) interest rates stabilizing, (iii) moderation of geopolitical instability, (iv) recessionary fears dissipating, and (v) valuation and broader earnings estimates improving. If the market begins to view a bottoming of conditions later this year, we may begin to see green shoots in the new-issue market following the 2022 audit season in the second quarter of 2023.

While markets and recovery periods are highly unpredictable, management teams can prepare today to maximize optionality and efficiency for when markets re-open. Being prepared provides organizations with greater discretion over transaction execution and ultimately success navigating the capital markets. Business predictability and the path to profitability will likely remain at the forefront of investor attention when IPOs return, and those organizations best prepared to address these considerations can have an advantage in the marketplace.

Companies seeking to access the public markets when conditions improve are encouraged to consult EY Equity Capital Markets to develop their strategic transaction readiness strategies. We work with management teams to:

• Stay well informed on the IPO market
• Review key IPO transaction milestones 
• Review strategies to enhance IPO execution in challenging markets
• Manage the readiness process to capitalize on open market windows
• Optimize underwriter selection and analyst engagement
• Set realistic and achievable expectations for forward milestones and performance

Please reach out to our team with any questions around current market dynamics and/or how your organization can best prepare to navigate today’s challenging markets and ultimately the new-issue market recovery.

Summary

IPO market retrenchments are not without precedent. Issuers and investors alike have faced similar slowdowns in the past, with history suggesting renewed appetite for IPOs may return in the not-too-distant future.

While markets and recovery periods are unpredictable, management teams can prepare today to maximize optionality and efficiency for when markets re-open.

Being prepared provides organizations with greater discretion over transaction execution and ultimately success navigating the capital markets.