Long drought in the US IPO market revives memories of the collapse of Internet companies

There’s an unexpected winner from the recent slowdown in the US market for initial public offerings: New York wedding planners.

David Goldschmidt, global head of capital markets at Skadden Arps, said he’s seen a slight increase in engagement and wedding announcements among employees who put their plans on hold during the listing rush in 2020 and 2021.

After two extraordinarily busy years, many of the city’s capital markets lawyers are taking advantage of having more free time. Companies including Paul Weiss, Fried Frank and Skadden told employees that they can work remotely for three or four weeks during August.

“The work-life balance has to be in a sustainable state over the long term,” Goldschmidt said. “In 2021… this balance was out of control.”

The less-than-crazy pace in law firms may sound good, but it has also been accompanied by a decrease in pay hours, after the stock market slump had a chilling effect on initial public offerings in the United States. A perfect storm of deteriorating valuations, economic uncertainty and market volatility has led to a 95 percent drop in IPO fundraising so far this year compared to the same period in 2021.

It was always tough to keep up with the fast pace of 2021, when debt and equity surges set new records, but the extended drought was so pronounced that some began comparing it to the fallout from the dotcom crash at the start of the century.

Companies raised just $5 billion in initial public offerings in the United States this year, according to Dealogic, compared to $105 billion in the same period last year. The tech sector, which dominated the previous IPO boom, has been hit particularly badly: Labor Day will mark 222 days since the last major tech listing, just two weeks ahead of the 21st century record set in 2008, according to data compiled by Morgan. Stanley. Technology Capital Markets team.

“This will be the longest window in the past 20 years,” said Paul Cowan, chief banker at the former IPO at Morgan Stanley, who is now managing director at venture capital firm General Catalyst.

Kwan isn’t the only one offering such an assessment. When KKR’s capital markets team conducted a survey last month of its largest clients, less than a third thought capital markets would be back in full swing after next month’s Labor Day holiday. Nearly half thought a proper reopening wouldn’t happen until next year, and David Power, KKR’s head of capital markets, said expectations had cooled further in the weeks since the survey.

“There will be a very high bar for investors to be willing to place new risk positions for the rest of this year,” Bauer said. “It makes more sense to come next year when [investors] Clean record. . . And you have more perspective on how to steer companies into 2023 and 2024.”

In contrast to the crisis that followed the 2007-2008 subprime mortgage crisis, the glut of cheap money that companies have been able to tap into in the past few years means that the weak IPO market has yet to coincide with a wave of restructuring and corporate collapse.

“In previous bad markets, things seemed to go wrong quickly, and we went from boom to bust,” said Adam Fleischer, partner at Cleary Gottlieb. “[This year] Because most companies already had enough money to last for a while, serious arithmetic never arrived.

That’s good news for many companies, but bad news for the lawyers and other firms that relied on restructuring 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 crash of the Internet rather than an existential economic threat. “What we’re dealing with now may be worse for our business but it’s less terrifying.”

The “sun side”, he added, is that strong economic fundamentals should allow for a faster recovery when markets stabilize and the IPO window opens.

Bankers, traders and venture capitalists alike have emphasized that there is still a strong pipeline for companies wanting to go public. Peter Giacchi, who directs the trading team at Citadel Securities at the New York Stock Exchange, said more clarity on the pace of interest rate hikes at the Fed’s next meeting in September could help reduce volatility and open a short window for listing before the mid-term November. elections.

Roshni Banker Cariello, partner at Davis Polk, said early movers are expected to come from the relatively less risky end of the pipeline, large companies and “high-profile names or those with stronger fundamentals rather than just growth stories.”

Instacart, the grocery delivery app that recently cut its internal rating by more than a third, is expected to be among the first to test the market, according to several people familiar with its plans. Mobileye, Intel’s self-driving car unit, is seen as another strong candidate given its record of profitability and the support of its current owner.

“The first big one is always the hardest,” said Ari Rubinstein, CEO of GTS, a trading company and market maker. “If something is put on the market and is doing well, it will probably bring in a lot of followers. But if it is chaos, it has the opposite effect.”

Eyecare Bausch & Lomb presents a recent cautionary tale. A profitable household name backed by a larger mother group, it was seen as an ideal candidate to reopen the market when it listed in May. However, the pitching for the deal coincided with a bout of extreme market volatility, and the company raised $210 million less than it had initially hoped. Since then, only one IPO of over $250 million has been completed.

The list of deferred floats expanded on Monday, when insurance group AIG said it had postponed the planned listing of its life and asset management unit “due to a high degree of stock market volatility” in May and June.

Skadden’s Goldschmidt said a recent surge in mergers and acquisitions such as Amazon’s $4 billion deal for One Medical will help markets stabilize, and a good second-quarter earnings season will encourage more secondary stock sales from already listed companies, a less risky type of raising money. That usually recovers before the IPO.

In the meantime, some companies will turn to sources of private capital to help overcome them. Many bankers said they expect to see an increase in structured deals such as pre-IPO convertible bonds, which can be used to raise capital without accepting a lower valuation by raising traditional equity. However, some say companies should not continue to cling to the unrealistic valuations set by a small number of investors at the height of the boom.

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

Reemer, who set up Index’s office in London in the midst of the dotcom crash in 2002, said the pre-IPO companies hit by this downturn should become “more resourceful, nimble and thoughtful,” but said many would emerge stronger, unlike What happened during the dotcom bubble.

“They are real companies . . . in the early 2000s when there was bankruptcy, a lot of those affected companies were still concepts,” he added, citing companies like Webvan, a grocery delivery group that filed for bankruptcy in 2001, and Pets.com, which is now no longer the online pet supply company. “The notions weren’t wrong, but . . . that was too early.”

Most executives are optimistic that activity will return to normal in 2023, albeit at lower levels than it was in 2020 and 2021. General Catalyst’s Kwan said he hopes the downturn will force companies to take a more responsible approach to future growth, but others expect More permanent scars. For example, the bank’s chief executive said that private equity firms in particular will keep portfolio companies private for a longer period.

“The waste will choke the markets for a few years,” he added.

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