Key Point
- Market uncertainty has caused some companies to postpone or reconsider their 2023 IPO plans, but with strategic planning and advance preparation, companies may be better able to execute on 2024 opportunities. there is.
- Despite rising interest rates, companies were able to respond nimbly to market opportunities by proactively analyzing their balance sheets and capital structures and successfully executing a significant number of debt transactions.
- Companies also continued to focus on creative financing strategies, including private capital as well as alternative public equity transactions.
Market background in 2023
In 2023, U.S. and European capital markets proved surprisingly resilient in the face of challenges such as the Top 10 list of major market disruptors.
- Rapid rise in long-term interest rates.
- inflation.
- failure of established banking institutions;
- Tighten credit and loan standards.
- US debt ceiling crisis.
- The war continues in Ukraine.
- The outbreak of fighting in Israel and the Gaza Strip.
- the possibility of a (repeat) U.S. government shutdown;
- Concerns about economic recession continue.
- Overall economic and geopolitical uncertainty leading up to the 2024 US presidential election.
Benchmark interest rates have reached new highs this year, with the Fed’s federal funds rate at its highest in more than 20 years, the Bank of England’s interest rate at its highest in 15 years, and the European Central Bank raising interest rates to record levels. . As a result, valuations for both stocks and bonds changed significantly in 2023, with overall new issuance negatively impacted.
Through strength, perseverance, creativity and agility, many companies were able to successfully overcome difficulties and execute trades during periods when markets were only open for short periods of time. The IPO window gradually opened, the bond market appeared to accept the new normal of rising interest rates, and issuers and funding sources continued to explore creative alternatives to traditional capital market transactions.
Looking ahead to 2024, both issuers and investors need to focus on positioning themselves to take advantage of market opportunities as they arise. Preparing in advance, considering financing alternatives, and remaining agile in execution allows companies to adapt to changing capital market norms, act opportunistically, and achieve their financing goals.
(For the latest information on Asian capital markets, seeChinese issuers see progress on US audit issues and Hong Kong exchange reform, but US policy could impact tech companies. ”)
Expecting positive signs in the IPO market
The IPO market is often viewed as a barometer of economic health and corporate growth. There were initial signs that the IPO drought, the longest stretch of low issuance in more than 30 years, could end in 2023. Shares of Mobileye and Porsche, which went public in late 2022, continued to trade above their IPO prices. Arm, Hidroelectrica, Instacart, Klaviyo, Oddity Tech, Schott Pharma, and Birkenstock all moved forward with long-awaited IPOs in the second half of 2023.
Through strength, perseverance, creativity and agility, many companies were able to successfully overcome difficulties and execute trades during periods when markets were only open for short periods of time.
Large IPOs in 2023 will feature profitable companies with core investors (financial or strategic), no-deal roadshows, traditional shareholder lock-ups, and conservative valuations (market The characteristics of IPOs that have been well received in However, while many of 2023’s IPOs experienced strong demand and initial price increases, most have since traded below their initial prices due to rising interest rates and other challenges, including geopolitical turmoil. .
As of Dec. 1, only about 38% of the 157 U.S. IPOs in 2023 traded above their IPO price, while in Europe only about 38% of the 102 European IPOs traded above their IPO price. 65% remained above the IPO price.1 Among US and European companies that IPOed in 2021 and 2022, only 21% and 30%, respectively, in the US and 19% and 42%, respectively, in Europe traded above their IPO price. .
Market uncertainty has caused some companies considering going public in 2023 to postpone or reconsider their plans. The number of U.S. IPOs through December 1, 2023 (157) was low compared to the median number over the past 10 years (272), even when annualized over the full calendar year. Europe has seen a similar decline in IPOs, with the year-to-date number of IPOs (102) lower than the median number over the past 10 years (211), even on a calendar year basis. Masu. However, many companies are still preparing for IPOs in the near term, and we expect the market to be more stable and receptive in 2024.
Companies considering an IPO or other exit in 2024 and beyond can take advantage of the current slowdown in IPO activity to continue preparing for deals and be able to act quickly when market opportunities present themselves. . Your strategic plan should include:
- Work with your advisor to enhance your company’s readiness for the public markets.
- Focus on financial health.
- Refine your corporate message to create value.
- Analyze exit strategies and alternatives.
European issuers and investors should also strive to work more closely together to narrow the valuation gap that is holding back the IPO market. This is similar to the approach seen in the US, where shareholders tend to accept lower IPO valuations compared to valuations from previous funding rounds.
Find selective opportunities in debt markets
The capital market challenges of 2023 also affected the bond market. Higher interest rates meant higher bond coupons for issuers, resulting in fewer bond issuances and increased volatility for both issuers and investors.
However, given the long-term high interest rate environment, the bond market began to stabilize towards the end of the year. Many issuers recognized that despite the increased costs, bonds could be a more attractive option than selling stock at a lower price than desired.
Investment-grade companies and high-yield issuers, some of whom were issuing corporate bonds for the first time, were able to successfully execute transactions. Effective September 1, 2023, U.S. issuers have closed over 520 investment grade and over 50 high yield offerings. During the same period, European issuers closed more than 480 investment grade and 40 high-yield offerings.
In 2024, bond markets will continue to be affected by rising interest rates, inflation, and economic policy. Companies can best prepare by:
- Analyze balance sheets for short-term and future financing and refinancing needs.
- Review and rationalize capital structure.
- Be ready to act quickly to access selected opportunities.
Explore alternatives to traditional financing
Given the uncertainty and volatility of traditional capital markets, companies on both sides of the Atlantic continued to explore creative strategies to achieve their financing and capital structure goals. Alternatives include:
- Direct list.
- Registered direct.
- Provision of Rights.
- Private Investment in Public Equity (PIPE).
- Direct loans or other private credit.
- Exchange offers and other liability management techniques.
Some use a combination of these structures.
Direct list. In 2023, a small number of direct listings resumed in the United States. Surf Air Mobility was his first direct listing in more than a year and his first significant direct listing activity in more than two years.
A direct listing allows investors in a company to begin trading their shares on an exchange without the company issuing shares or major shareholders selling their shares as in a traditional IPO. A direct listing allows a company to go public without incurring IPO underwriting costs or stock dilution.
However, direct listings typically do not raise additional capital and have historically provided lower returns for investors than traditional IPOs. As a result, direct listings are generally not widely used. These are often done by companies that have no alternative means of raising capital, or by very well-known and well-capitalized companies that are willing to decline an IPO roadshow or debut.
Private investment. Given the volatility of capital markets, many companies have chosen to avoid public markets altogether and rely on private investment from one or a few sophisticated investors. Depending on the objectives of the company and the investor, private investments can be structured in a variety of ways. Convertible or Derivative Securities. Mezzanine or other debt-like instruments. or a combination of these.
Private investment can be an attractive method of raising capital due to both the speed of execution and the increased flexibility in structuring and pricing investments. In addition, companies can also use this structure to achieve other objectives by combining strategic partners with private investments and other collaborative transactions. So far in 2023, U.S. companies have raised nearly $50 billion in direct financing in more than 100 deals.
Issuers considering private investments or other financing vehicles should carefully consider the alignment of the transaction with the investor and their strategy. For example, companies need to consider not only future obligations such as registration rights, but also additional rights that investors may request, such as rate of return guarantees, governance or approval rights, and priority rights in the capital structure. there is.
The type of investor also matters. Are they a long-term strategic partner for the company, or are they likely to exit the investment product in the short term?
It is also essential for the company to ensure that the terms of the investment do not unduly limit its ability to take other necessary actions, such as other financing or refinancing transactions, should public markets strengthen in the future.
Looking to opportunities in 2024
Issuers and investors are best prepared for 2024 by being agile and positioned to take advantage of market opportunities as they arise. Companies considering a deal should work with their advisors to plan ahead, explore creative and alternative financing strategies, stay informed about market conditions and trends, and execute with agility. is needed.
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1 IPO data includes traditional IPOs, SPACs, best effort products, and all other IPOs, regardless of deal size. Data for this article comes from Bloomberg.
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