A long drought in the U.S. IPO market brings back memories of the dotcom meltdown

There is one unlikely winner from the recent downturn in the US IPO market: New York wedding planners.

David Goldschmidt, global head of capital markets at Skadden Arps, said he has seen an increase in engagement and wedding announcements among employees who put projects on hold during the 2020 and 2021 listing rush.

After two extraordinarily busy years, many of the city’s financial markets lawyers are making the most of their free time. Companies such as Paul Weiss, Fried Frank and Skadden have told staff they can work remotely for three or four weeks in August.

“Work-life balance should be in a sustainable state over the long term,” Goldschmidt said. “In 2021. . . this balance was unbalanced.

A less frenetic pace in law firms may sound nice, but it has also been accompanied by a reduction in billable hours, after falling stock markets have had a chilling effect on IPOs in the United States . A perfect storm of plummeting valuations, economic uncertainty and market volatility has resulted in a 95% drop in IPO fundraising so far this year compared to the same period of 2021.

It was always going to be difficult to keep up with the frenetic pace of 2021, when debt and equity raisings set new records, but the prolonged dry spell is so pronounced that some have started comparing it to the aftermath of the collapse. dotcoms at the turn of the century.

According to Dealogic, the companies raised just $5 billion in traditional U.S. IPOs this year, down from $105 billion in the same period last year. The tech sector, which has dominated the boom in previous IPOs, has been particularly hard hit: Labor Day will mark 222 days since the last major tech listing, just two weeks from the 21st century record set in 2008, according to data compiled by Morgan Stanley. the technology equity capital markets team.

“It will be the longest window shutdown in 20 years,” said Paul Kwan, a former senior IPO banker at Morgan Stanley who is now a managing director at venture capital firm General Catalyst.

Kwan is far from alone in offering such an assessment. When KKR’s capital markets team surveyed its biggest clients last month, less than a third thought equity markets would be back in full swing after the Labor Day holiday next month. Nearly half thought a proper reopening wouldn’t happen until next year, and David Bauer, KKR’s head of equity markets, said expectations had fallen further in the weeks following the investigation.

Bauer said “there will be a very high bar for investors to be ready to take new risk positions for the rest of this year. It makes more sense to come next year when [investors] have a clean slate. . . and have more perspective on how companies are heading into 2023 and 2024.”

Unlike the crisis that followed the subprime mortgage crisis of 2007-08, however, the glut of cheap money that companies have been able to tap into in recent years means that the weakness in the IPO market will not does not yet coincide with a wave of corporate restructuring and collapse.

“In previous bad markets, things seemed to go wrong quickly, we went from boom to bust,” said Adam Fleisher, partner at Cleary Gottlieb. “[This year] because most businesses already had enough money to keep going for a while, the serious toll didn’t happen.

That’s good news for many companies, but bad news for lawyers and other firms that relied on restructuring work as an alternative source of fees when IPOs dried up. A senior executive at a major investment bank said the current environment was a “financial market shock” like the dotcom crash rather than an existential economic threat. “What we’re facing right now may be worse for our business, but it’s less scary.”

The “silver lining,” he added, was that stronger economic fundamentals should allow for a faster recovery when markets stabilize and the IPO window reopens.

Bankers, traders and venture capitalists pointed out that there remains a strong pipeline of companies seeking to go public. Peter Giacchi, who leads Citadel Securities’ floor trading team at the New York Stock Exchange, said more clarity on the pace of interest rate hikes at the Federal Reserve’s next meeting in September could help reduce volatility and open a short window for quotes before the November midterm. elections.

Early players are expected to come from the relatively less risky end of the pipeline, larger companies and “big name names or those with stronger fundamentals rather than just growth stories,” said Roshni Banker Cariello, partner at Davis. Polk.

Instacart, the grocery delivery app that recently slashed its internal valuation by more than a third, is set to be one of the first companies to test the market, according to several people briefed on its plans. Mobileye, chipmaker Intel’s self-driving car unit, is seen as another strong contender given its profitability and the backing of its current owner.

“The first big one is always the hardest,” said Ari Rubenstein, managing director of GTS, a trading company and market maker. “If something hits the market and works well, it will probably bring a lot more afterward. But if it’s a mess, it has the opposite effect.

Eye care company Bausch & Lomb provides a recent cautionary tale. A profitable household name backed by a larger parent group, it was seen as an ideal candidate to re-open the market when it listed in May. However, the deal’s roadshow coincided with a particularly severe bout of market volatility and the company raised $210 million less than it had originally hoped. Only one IPO worth more than $250 million has been made since.

The list of IPOs that have been postponed grew longer on Monday, when insurance group AIG announced it had postponed the planned listing of its life and asset management unit “due to high volatility in equity markets”. in May and June.

Skadden’s Goldschmidt said a recent increase in mergers and acquisitions such as Amazon’s $4 billion deal for One Medical would help markets stabilize, and a decent second-quarter earnings season would encourage more sales. secondary shares of already listed companies, a less risky type of fundraising. which usually recovers before IPOs.

In the meantime, some companies will look to private sources of capital to help them get by. Several bankers said they expected to see an increase in structured transactions such as pre-IPO convertible notes, which can be used to raise capital without accepting a lower valuation through a traditional capital raise. However, some say companies should not continue to cling to the now unrealistic valuations assigned by a small number of investors at the height of the boom.

Danny Rimer, Partner at Index Ventures, said: “Should you take a lower valuation on clean terms today versus a higher valuation or even the same? Our recommendation would be first, any day of the week.

Rimer, who set up Index’s London office amid the 2002 dotcom meltdown, said pre-IPO companies hit by that downturn should become “smarter, leaner and more thoughtful,” but said that many would emerge stronger, unlike during the dotcom bubble.

“These are real businesses. . . in the early 2000s, when there was a meltdown, a lot of these companies affected were still concepts,” he added, citing companies such as Webvan, the grocery delivery group that filed for bankruptcy. in 2001, and Pets.com, a now defunct company. online pet supply company. “The concepts weren’t wrong, but. . . it was just way too early.

Most executives are optimistic that activity will normalize in 2023, albeit at lower levels than in 2020 and 2021. General Catalyst’s Kwan said he hoped the slowdown would force companies to adopt a more responsible approach to growth in the future, but others predict longer. lasting scars. For example, the bank’s senior executive said private equity firms in particular would keep holding companies private longer.

“The hangover will stifle the markets for a few years,” he added.

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