Long drought in US IPO market revives memories of dotcom bust


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

David Goldschmidt, Skadden Arps’s global head of capital markets, said he had seen an uptick in engagement and wedding announcements among employees who had put plans on hold during the rush of listings in 2020 and 2021.

After two extraordinarily busy years, many of the city’s capital markets lawyers are making the most of having more free time. Firms including Paul Weiss, Fried Frank and Skadden have told staff they can work remotely for three or four weeks over August.

“Work-life balance should be in a state that is sustainable for the long term,” Goldschmidt said. In 2021. . . that balance was out of whack.”

A less frenetic pace at law firms might sound nice, but it has also been accompanied by a reduction in billable hours, after falling stock markets had a chilling effect on the US IPOs. A perfect storm of tumbling valuations, economic uncertainty and market volatility has resulted in a 95 per cent decline in IPO fundraising so far this year versus the same period of 2021.

It was always going to be a tall order to match the whirlwind pace of 2021, when debt and equity raisings set new records, but the extended dry spell is so pronounced that some have started comparing it to the aftermath of the dotcom bust at the start of the century.

Companies have raised just $5bn in traditional IPOs in the US this year, according to Dealogic, compared with $105bn in the same period last year. The tech sector, which dominated the earlier IPO boom, has been particularly badly affected: Labor Day will mark 222 days since the last major tech listing, just two weeks shy of the 21st century record set in 2008, according to data compiled by Morgan Stanley’s technology equity capital markets team.

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

Kwan is far from alone in offering such an assessment. When KKR’s capital markets team last month surveyed its biggest clients, fewer than a third thought equity capital markets would be back in full swing after next month’s Labor Day holiday. Almost half thought a proper reopening would not occur until next year, and David Bauer, KKR’s head of equity capital markets, said expectations have slipped even further in the weeks since the survey.

Bauer said “there’s going to be a very high bar for investors to be willing to put on new risk positions for the rest of this year. It’s more logical to come in next year when [investors] have a clean slate . . . and have more perspective on how companies are guiding into 2023 and 2024.”

Unlike the crisis that followed the 2007-08 subprime mortgage crisis, however, the glut of cheap money that companies were able to tap in the past few years means the weak IPO market is not yet coinciding with a wave of restructurings and corporate collapses.

“In prior bad markets, things seemed to go bad quickly, we went from boom to bust,” said Adam Fleisher, a partner at Cleary Gottlieb. “[This year] because most companies already had enough money to keep going for a while, the serious reckoning hasn’t arrived.’

That is 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 large investment bank said the current environment was a “financial market shock” like the dotcom crash rather than an existential economic threat. “What we are dealing with 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 settle and the IPO window reopens.

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

The first movers are expected to come from the relatively lower-risk end of the pipeline, larger companies and “marquee names or those with stronger fundamentals rather than just growth stories”, said Roshni Banker Cariello, a partner at Davis Polk.

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

“The first big one is always the most difficult,” said Ari Rubenstein, chief executive of GTS, a trading firm and market maker. “If something comes to market and does OK, it will probably bring a lot more following it. But if it’s a mess, that has the opposite effect.”

Eyecare company Bausch & Lomb provides a recent cautionary tale. A profitable household name backed by a larger parent group, it was seen as a perfect candidate to reopen the market when it listed in May. However, the deal roadshow coincided with a bout of particularly severe market volatility and the raised company $210mn less than it had initially hoped for. Only one IPO worth more than $250mn has been completed since.

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

Skadden’s Goldschmidt said a recent uptick in mergers and acquisitions such as Amazon’s $4bn deal for One Medical would help markets stability, and a decent second-quarter earnings season would encourage more secondary share sales from already-listed companies, a less risky type of fundraising that typically recovers before IPOs do.

In the meantime, some companies will turn to sources of private capital to help tide them over. Several bankers said they expected to see an increase in structured deals such as pre-IPO convertible notes, which can be used to raise capital without accepting a lower valuation through a traditional equity raise. However, some say companies should not keep holding on to now unrealistic valuations assigned by a small number of investors at the peak 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 the former, every day of the week.”

Rimer, who set up Index’s London office in the midst of the dotcom collapse in 2002, said pre-IPO companies affected by this downturn would have to become “more resourceful and lean and thoughtful”, but said would come out stronger, unlike many during the dotcom bubble.

“They’re real companies . . . in the early 2000s when there was a bust, a lot of those affected companies 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 online pet supplies company. “The concepts were not wrong, but . . . it was just way too soon.”

Most executives are optimism that activity will normalize in 2023, albeit at lower levels than in 2020 and 2021. General Catalyst’s Kwan said he hoped the downturn would force companies to take a more responsible approach to growth in the future, but others are predicting more long- lasting scars. For instance, the senior bank executive said private equity firms in particular would keep portfolio companies private for longer.

“The hangover will stifle markets for a couple of years,” he added.

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