In November 2021, the Chairman of the Federal Reserve, Jay Powell, announced his intention to fight inflation aggressively by embarking on a cycle of tapering and interest rate hikes. The impact was immediately felt on equity capital and IPO markets. The heady spell of near-zero rates, abundant access to capital, and sky-high company valuations was officially over. After a record year for investment banking in 2021, in which fees reached a record $159.4 billion, financiers braced themselves for a sharp decline.
Indeed, 2022 was a muted year for investment banks as higher rates, geopolitical tensions, and lower risk appetite took capital out of markets and disincentivised firms from going public. Investment banking fees reached only $110.5 billion in 2022, down by a third compared to the year before.
These trends have continued into this year – according to S&P Global, advisory and capital markets underwriting revenues plunged to a seven-year low in the first quarter of 2023, with nine out of the 13 investment banks tracked by S&P Global Market Intelligence seeing year-on-year revenue drops in the same period.
JPMorgan’s investment banking revenue dropped 6% in the second quarter, with a 19% decline in fees from M&A deals compared to an already quiet 2022. Most of the bank’s competitors posted similar results, prompting job losses across the board.
There have been several high-profile IPOs in recent months, which had prompted some optimism that the IPO market could be about to come roaring back, but this is hardly how it’s panned out. The IPO of the year – SoftBank-banked chip designer Arm’s $54.5 billion listing – had mixed results at best.
Arm fluctuated above and below its $51 listing price in the fortnight after the initial listing. The price originally strengthened to over $63 – a rise of 25% on its first day of trading on the NASDAQ – but then fell back significantly after the Federal Reserve indicated that it would support further interest rate hikes this year. At time of writing, Arm is trading at $51.70 – mere cents above its original price.
Instacart, an online grocery delivery company, had high hopes of a successful listing in light of Arm’s initially strong performance. Ahead of its listing on September 19th, the firm even took the step of raising its IPO price range to around $30 per share, valuing the company at $10 billion on a fully diluted basis. However, the share price is now significantly below its original listing price, with the company trading on the NASDAQ at below $27 at time of writing.
These unspectacular listings have dampened optimism in many quarters that the IPO market could be revived this year. There have been reports that venture capitalists are advising start-ups to delay any listing plans until such times as interest rates in the US have come firmly down. Mike Volpi, a general partner at venture capital firm Index Ventures, told the FT that “in our portfolio we would advise unless you really need to, hold back […] the market has been rough in the past few weeks – unless you need to go out, I’d wait until the second half of next year.”
However, Goldman Sachs appears to be more bullish than most on the prospects for the IPO market. In a recent media appearance, David Ludwig, Global Head of Equity Capital Markets in Goldman Sachs’ Banking and Markets Business, said “we’re having a soft opening of the IPO market – it’s clear from the last handful of transactions that high-quality companies have very efficient access to capital markets and we’re seeing better valuations.”
While Ludwig was careful to note that the market remains far-off the 2021 highs and this is very much a “soft opening,” he said that he was “very positive” about the market and that “investor confidence has definitely been improving.”
“The world cycles – there’s going to be a point in time where rates are getting cut, more money will go into growth, investors are going to be willing to invest in companies that are profitable or very close to profitability,” he added. “Overall, we’re heading in the right direction.”
Some would argue that this is a contrarian argument given the difficult macroeconomic conditions that remain in place and given the muted Arm and Instacart IPOs. Interest rates remain at elevated levels in the US and the Fed has consistently been keen to maintain a hawkish stance. Geopolitical tensions between East and West remain high, as does political volatility, dampening risk appetite. A spate of high-profile collapses in the banking sector, including that of Silicon Valley Bank and Credit Suisse, has further rocked the industry.
However, Jai Doshi, a portfolio manager at a prominent family office in Dubai, told Disruption Banking that “my views are aligned with Goldman Sachs.”
“For the most part, we didn’t see many large IPOs in 2023, with the exception of a notable few such as Arm and Instacart,” he said. “The key uncertainty this year was how high rates would go and the forward-looking interest rate path. As there is more clarity that the Federal Reserve is coming to the end of its hiking cycle, and will keep rates higher for longer going into 2024, many private companies have realised that they cannot wait for perfect market conditions to continue capital raising.”
Despite turbulent market conditions, it seems there are considerable amounts of optimism that the IPO market could soon be back – if not roaring back, certainly with what Ludwig called a “soft opening.” Given the understandable reluctance of companies to go public over the last couple of years, the private markets data company PitchBook estimates that there is a backlog of almost 80 IPO candidates. Could conditions be about to change – and could this backlog soon be released?
Author: Harry Clynch
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