It’s an old saying that everyone has heard: walk before you run.
Equity Capital Markets may truly be taking that advice to heart after a gruelingly slow calendar to start 2022. A confluence of volatility and market fatigue has been met with a new round of geopolitical uncertainty (Russia-Ukraine) only clouding further uncertainty about when activity in both IPOs and Secondary offerings will resume.
After polling a few market experts, we wanted to provide an update on the state of the IPO and Secondary market:
- Volatility – The index that many ECM experts pay attention to is the VIX (Volatility Index). Prior to the pandemic, the “safe-zone” was the sub-15 level. After the shock of March 2020, that level has adjusted to around 20 and notably, the VIX had been on a steady decline until just recently. Headlines over this period have shifted from covid-centric to inflation-hysteria, then onto rate-hikes… and have now parked themselves at the border of Ukraine and Russia. Looking ahead to the rest of 2022, the next market events that could dramatically impact the VIX and further dampen the IPO calendar include news surrounding rate-hikes as well as mid-term elections. But the key to look for, when volatility does subside, companies will be looking to go public.
(VIX WEEKLY CHART)
- Market Fatigue – Let’s be honest — the IPO market had been on quite the run. From June 2020 until November 2021 (18 month stretch), there were a total of 483 IPOs from tier-one and tier-two underwriting groups. The peak of this stretch came in June and July of 2021 where 102 IPOs came to market. 483 IPOs to go public in an 18-month stretch is the volume we are accustommed to seeing in 3.5-to-4 years. After a stretch of just nine IPOs (tier one and tier two underwritten groups) over the last three months, the “business” is certainly itching for activity, but we would be remiss to say that a “break” was not needed. We have had stretches of dormancy in the past, a quick search of one of these most recent periods was documented in this March 2016 article. But getting the IPO train back on the tracks means a shift from a growth-oriented mentality into a value-oriented state of mind.
- Valuation Reset – A difficult hurdle for the IPO market to overcome in the short-term will be the dialogue that is happening right now between bankers and potential companies. Companies that initially filed paperwork with the SEC to go public are now being told they are worth 70-or-80 cents on the dollar versus six months ago despite strong fundamentals. Factoring in all the elements that led to the current market volatility, IPO investors are needing assurances that they are buying companies with a fair valuation. The “Buy-and-Hold” IPO crowd is in a painful trade from 2021 as the 328 IPOs (tier one/two & non-SPAC) that opened +18.8% at first trade are collectively trading at -25.9% as of this morning (2/22/22 intraday). Making matters worse, there were 32 IPOs in 2021 that raised $1b or more and those 32 are currently (on average) 32% below the issue price (on average). When ECM experts speak of the “IPO window” and making sure to go public when the time is right, this situation is the pitfall that many companies try to avoid.
- Who Braves the Market First? That’s the million dollar question and it takes us back to what we said at the top of this article: walk before we run. We have been told that this last week of February is likely to have minimal activity. That is now understandable with the headline-shock over the holiday weekend stemming from Ukraine and Russia. However, our sources say that activity is expected to pick up in March. The “earnings-blackout” is in the rear view mirror and the pipeline is full. We would anticipate a couple of wall-crossed secondary offerings (marketed confidentially prior to launch) to lead the way. From an IPO standpoint, we would “think” that a blue-chip company with a story that investors can easily wrap their heads around would be an ideal candidate to be first out of the gates. The company that fits this mold is Bausch + Lomb Corporation (BLCO) which filed for IPO on January 13 (See their SEC Filing here). Another thing to keep in mind, many of the companies that are technically in the pipeline now have financials that have gone stale. The companies that are looking to go public in the near term will now be needing to update paperwork with the SEC.
Conclusion: The slump to start 2022 has been anything but ideal. We do know one thing: there is a substantial backlog. Let’s go down memory lane: Remember the beginning of the pandemic…think March and April 2020. The market and the IPO activity looked as if we may have a drought that could have lasted much longer than it did. If that period taught us anything it was that once the flood gates open, the activity pours in. And rest assured, IPO Boutique will be ready to go when the time comes.
