IPO market to recover over the next year: Expert
Lineage (LINE) debuted on the Nasdaq on Thursday, raising $4.4 billion in its IPO (initial public offering) and making it the largest IPO seen in 2024. With inflation putting pressure on all corners of the economy, the market has seen a dip in IPOs.
Citi co-head of equity capital markets for North America Paul Abrahimzadeh joins Market Domination Overtime to discuss the state of the IPO market and its road to recovery.
"I think we've had a lot of good data points year to date. IPO volumes up over 100% year over year. That's off a low watermark. When you look at the backdrop with the S&P (^GSPC) up 15% this year after a 40% rise last year, the sixth-best rise in history last year, you've got a lot of factors that are driving issuance," Abrahimzadeh explains. "You've got the market trading within 5% of all-time highs. We're trading at 21 times on the S&P on a forward PE basis [price-to-earnings ratio]. That's a 12% premium to the ten-year trailing average. So there are a lot of reasons why issuers want to bring deals to market."
Abrahimzadeh notes that while markets this year have been focused on large-cap growth, "the reality is the aperture is widening" — especially as the Russell 2000 (^RUT) small-cap index has been on the move.
He believes that "the private market is starting to thaw" in the post-pandemic period: "The market is showing some green shoots. We're seeing an increase in valuations for sequential rounds. We're seeing less structure in the current period. But the reality is the IPO market's offering excessive demand. There's plenty of demand to get companies public at rich valuations. And deals are generally doing well."
Abrahimzadeh notes that 50% of IPO deals year-to-date have priced either at the high end or above their range, and the average day-one performance is up 15%, creating a "very good environment to bring companies public."
While the market continues to thaw, Abrahimzadeh also believes "the jewel box is going to open in the next 12 to 18 months."
For more expert insight and the latest market action, click here to watch this full episode of Market Domination Overtime.
This post was written by Melanie Riehl
Video transcript
The IP O market coming back to life a little bit this week lineage raising more than $4 billion in its market debut, making it the largest deal of the year.
And now there's a report that Honeywell is considering an IP O for its majority owned quantum computing firm next year.
Joining us now is Paul Abrahim Zad.
He is city co head of equity capital markets for North America, so he knows a lot about this.
Thanks for being here, Paul.
About the much promised much anticipated opening of the IP O market, which hasn't really entirely happened.
So when are we?
You know, arm was supposed to be the beginning.
It wasn't Is lineage the beginning?
Is that Honeywell thing gonna be like What?
What's the status?
I?
I think we've had a lot of good data points year to date.
Uh, IP O volumes up over 100% year over year.
That's off a low water mark.
Uh, when you look at the backdrop with the S and P up 15% this year after a 40% rise last year, the sixth best rise in history last year uh, you've got a lot of factors that are driving issuance.
You've got the market trading within 5% of all time highs.
We're trading at 21 times on the S and P on a Ford PE basis.
That's a 12% premium to the 10 year trailing average.
So there are a lot of reasons why issuers wanna bring deals to market.
Sponsors are sitting on $3 trillion of unsold assets they need to monetize on the demand side we're seeing again for the second year in a row, investors under performing their benchmarks.
So with the S and P at 15% this year, you're seeing mutual funds up 10% hedge funds, up 5%.
They naturally will look to the new issue market to augment performance and buy issues that are coming at some discount to intrinsic value.
And so, Paul, the the kind of companies you see coming, what would they be like?
Because I've heard some folks say what they expect is a lot in that sort of, you know, sub $10 billion market cap range is that Is that the kind of company you would see trying to test the public markets?
It's interesting the market's been year to date focused more on large cap, more focused on growth.
Uh, the reality is the aperture is widening.
So while we've seen plenty of growth IP S generating $10 billion or more of demand each, uh, I think lineage this week is a great example of the market looking at compounding growers, maybe a lower growth cohort than tech and health care.
They been 50% of the IPO market year to date.
Uh, so I think, as the market apertures broadening with this rally and small cap away from large cap, you're seeing that play out in the new issue market and IP OS in particular.
I I'm also curious what's happening in the private markets that's informing this because I also you say it's the apertures widening.
But I still think of these huge unicorns that are still private that we've talked about for years coming to market.
You know, I think of klarna.
I think of stripe where we keep talking about the coming and coming and coming.
Um, are they able to still raise as much money as they need in the private market and they just don't need to go public.
I think the private market is starting to thaw.
It's been a challenging two year period.
Post pandemic.
You saw a lot of down rounds, increased structure, frankly, more challenges to get capital raised.
The reality is that market is showing some green shoots.
We're seeing an increase in valuations for sequential rounds.
Uh, we're seeing less structure in in the current period.
But the reality is the IPO market is offering excessive demand.
There's plenty of demand to get companies public at rich valuations, and deals are generally doing well.
So 50% of IPOs year to date pricing at the high end or above their range, and the average day one performance is up 15%.
So very good environment to bring companies public again.
We talked about peak valuations in the broader secondary equity market.
Uh, investors are are definitely looking to put more capital to work in new issues.
I think the jewel box is gonna open in the next 12 to 18 months.
When you think about some of the must own private deck of coins, you referenced a few of them.
Uh, there will be no lack of demand of the public equity market, and I think at some point, given how long many of them have been private, they will definitely access the public market.
And Paul, what?
What kind of impact, if any, Do you think all the uncertainty about the election has modest?
We're actually.
Why do you say that?
I think the reality is volatility spiked to a peak of 19 this week off of an all time low.
At 12, it's back down at 16, so the market is expected to move up or down 1% per day.
That's still pretty safe.
The peak on the VIX was around 35 in the pandemic period, so the market still looks relatively stable.
Volatility probably picks up closer to the election.
We're seeing a long list of companies get ready to access the market in September ahead of the election.
A number are still considering the October window.
Uh, and I think once we get through the election at the beginning of November, if the markets stable, if markets remain near all time highs, you're gonna see pretty active calendar into year end.
And certainly in the 25 I think the base case for a lot of IP OS is first or second half of 25 depending on their individual performance.
But the reality is they wanna be opportunistic and ultimately tap this market at the right time.
Um, another trend I'm curious about is accessibility of IP to individual investors, Right?
We've seen a little bit of a trend over the past few years where you see an allocation for those folks.
Are we going to see more of that?
Are we going to see regular people having more ability to do that?
They definitely do through their institutionally managed capital.
So mutual funds remain the single biggest pool of capital for IPOs, so definitely access their mutual funds, right?
But I mean an individual being able to buy it directly.
Yeah, so retail.
Without a doubt.
I think with the advent of a lot of technology platforms, you're seeing increased access for retail to IPOs.
The question is gonna be on behalf of the boards, how much they'd like to allocate from a lay up perspective to retail.
I think a lot of companies are very focused on after market liquidity, long term holding positions, mediating churn, and so the behaviour of investors, whether It's institutional or retail factors into a lot of the decisions on layout.
And I think that'll be an important factor when it comes to retail layouts on on IP OS.
All right, Paul.
Great to have you on the show today.
Thanks so much for making time for us.
Thanks for having me.
I appreciate it.