Equity Capital Markets: Brighter 2023
After a record-setting 2021, fueled by high offering volumes and attractive valuations, 2022 reset the stage for equity offering activity. Driven by a hawkish Fed, elevated inflation and volatile markets, the market backdrop did not deliver optimal conditions for another year of robust IPO activity. With 2022 behind us, 2023 is expected to bring back market stability and with it, a return of equity offering activity.
2022 Equity Market in Review
The 2022 equity market was driven by several broad themes that led to subdued offering activity:
- Peak Uncertainty. The VIX averaged 25.6 in 2022 and reached as high as 38.9 in Q1, creating a difficult environment for equity issuance and requiring buyside investors to focus on managing existing portfolios rather than exploring new investment opportunities.
- Macro-driven Market. The record pace of Fed rate hikes targeted at taming inflation led to a valuation reset, particularly impacting high-growth sectors, including Technology and Healthcare. In addition, multiple geopolitical “black swan” events continued to threaten the market throughout the year, limiting near-term visibility.
- Offering Activity Reset. 63 IPOs and 287 follow-ons priced in 2022, down 70% from record-breaking 2021 and 53% from 2016-2020 average volumes. Micro-/small-cap transactions dominated the market with median IPO post-deal market cap of $157M in 2022 compared to $1B in 2021. Healthcare, Financial Services and Energy sectors increased their market share as a percentage of completed transactions as growth sector activity slowed.
- Follow-on Market Windows. Successful 2021 IPOs took advantage of a few narrow market windows throughout 2022 after brief bull rallies and lower volatility periods in August / September and November. 43, 32 and 45 follow-ons priced during those months, respectively, nearly double the monthly average for 2022.
- Opportunities for Path to Liquidity. Some sponsors behind recent IPOs turned to smaller and more tactical unregistered blocks to begin their path to liquidity instead of waiting for the market environment to become conducive for larger, traditional marketed follow-on transactions.
- IPO Activity Bright Spots. Mobileye priced the largest IPO outside of the Financial Services sector in 2022, raising $990M. The offering priced above the range, opened +27% on the first day of trading and remains +67% from offer price. Mobileye’s pricing and aftermarket success may be a precursor to high-quality assets entering the market.
- Pre-IPO Investors Double Down. Growth equity transaction volume fell from 2021 but surpassed 2020 and marked the second-highest year by dollar volume. Select pre-IPO investor analysis shows that the largest crossover investors increased their proportional participation in follow-on rounds vs. investing in new companies. Follow-on transaction percentage increased to 47% from 38% for selected investors, on average.
After an extraordinary 2021 and quiet 2022, the equities market will start to find its footing again in 2023.
- Rich IPO Shadow Backlog. 2022 began with a public IPO backlog of over 100 companies, a recent high, with many more on confidential file. These issuers are awaiting a stable market backdrop to bring their transactions to market. 200+ issuers are expected to IPO in the next two years, with 2023 IPO activity likely to be concentrated in the second half of the year.
- Leaving 2021 Behind. A simple reset of 52-week highs and lows will give buyside investors room to reset their benchmarks for the new class of issuers. 2021 valuation benchmarks will also reset for companies and sponsors to create positive tension in order books for stronger pricing dynamics in 2023.
- Time to Prepare. IPO candidates have benefited from additional preparation time allowing them to adjust business plans and collaborate closely with their transaction and internal teams to refine their plans for the public markets. Historically, the IPO Index outperforms the S&P 500 after slow offering activity periods.
- First Mover Characteristics. Scale, profitability or positive cash flow and clean structure will be important characteristics of 2023 IPOs that open the new offering window. In addition to top-line growth, earnings growth will be an important factor for investors near term.
- Sponsor-led Follow-on Market. After a flurry of sponsor-backed IPOs in 2021 mixed with depressed performance in 2022, an improvement in the equity market could lead to a quick boom in follow-on activity. 83% of sponsor-backed 2021 IPOs have not completed a secondary follow-on transaction, and improved market conditions would allow sponsors to begin or continue the liquidity process.
- Earnings Stability. Investors and economists are awaiting a reset of earnings growth outlooks from management teams in Q4 earnings.
2023 IPO Window Opening Checklist
Issuers and investors are eager to return to the market, but the broader market environment will remain the deciding factor.
- Stable Fed. Currently, investors expect 50-75 bps of additional rate hikes in 2023 with rates reaching a peak of 5.0% in Q2. A stable Fed funds rate in the second half of 2023 would provide market certainty for the offering window to reopen.
- Slowing Inflation. Signs of inflation slowing towards the Fed’s 2% goal throughout 2023 will be key to eliminate fears of persistent inflation and further monetary tightening.
- Geopolitics. A resolution or clarity in the geopolitical landscape would be a positive market catalyst in 2023 that would provide opportunities for longer marketing windows.
- Improving Performance. Stock price improvement for the class of 2021 IPOs would provide confidence for investors to begin participating in a new class of IPO issues.
2023 will be a steppingstone for a new IPO offering era, and Baird’s Equity Capital Markets desk can help you navigate the markets and prepare to take advantage of the upcoming offering windows.
Head of Equity Capital Markets