Our analysis indicates that IPOs will continue to remain muted for longer, resulting in high-quality and market leading companies remaining private for longer.
From 2010 to 2021, €1.3 trillion of private company equity value was listed on U.S. and European stock exchanges. These volumes were partly driven by peak transaction levels in 2020 and 2021 with €497 billion of listings across both markets for the two years (1). This buoyant public trading activity has not persisted into 2022 and YTD through Sept. 2023, which have seen IPO volumes fall to their lowest levels since 2010, with €64 billion of transaction volumes across both the U.S. and Europe for the two years, representing an 87% decrease from the volumes recorded in 2020 and 2021 (1).
Markets were hoping that recent high-profile listings would re-open the IPO window
Recent listings have drastically underperformed in both absolute terms and relative to expectations. This means IPO markets remain closed with profound consequences for private markets. The Instacart IPO from 19/9/23 was priced at around $9.9 billion, representing a 75% decrease from its prior fundraising round which valued the company at $39.0 billion (2). Despite this aggressive price cut, as of 10/30/23 the company had generated a -14.0% return for public trading investors. Much like the Softbank-backed semiconductor business, ARM, which went public on 15/9/23 and as of 10/30/23 had generated a -19.2% return for public trading investors (2). This trend follows that of most listings from 2019 to 2021, which are expected to underperform in the medium-term. (2).
Public trading and private markets investors have different investment experiences
The 20 largest technology IPOs of 2020 all stemmed from companies that were previously backed by private equity and venture capital funds. Investors that committed to these funds were treated radically differently to investors who subscribed to the IPOs of these companies. The returns generated in private markets were staggering, with 12/20 companies going public at valuations exceeding $10.0 billion(3), whereas the IPO returns were all drastically disappointing – only datto was able to generate a positive return for public trading investors, because it was acquired by another private company, Kaseya (3).
Private companies are remaining private for longer
Value creation has shifted from public trading to private markets. Historically,companies primarily listed to get access to risk capital. Today, risk capital is more broadly available in private markets, and should one company have the choice, it would probably stay private and drive a long-term value creation plan instead of going public to focus on quarterly earnings reports. The emergence of alternative exit routes such as GP-led continuation vehicles has equipped private investors with the necessary tools to maintain control of their assets, continue driving growth and providing liquidity to investors. Secondary continuation transactions have continued to gain popularity, with these expected to reach $40 billion of transaction volumes for FY 2023, representing close to 40% of the overall secondaries market (5).
ROYC’s research suggests that IPO markets have historically experienced cycles ranging from 5 to 7 years
We believe that 2023 represents year 2 for the current cycle. Based on our research it is not unreasonable to assume that IPO volumes will remain at lower levels for several years. The reduced level of IPO activity is driven by a lack of demand from public trading investors for new listings, which stems from higher for longer interest rates, volatile public trading performance and economic inflationary pressures. This is especially troublesome for high-growth, less profitable technology companies, which are further burdened complicated capital structures. As quoted by Index Ventures' Mike Volpi recently “In our portfolio we would advise: unless you need to [go public],hold back” (6). Until this is done, high quality companies will continue to thrive and create value in the private market domain.
Conclusions
- Appetite for IPOs
is currently at a multi-decade low meaning the window to go public is largely closed for now - Data suggests that IPO markets work in cycles ranging from 5 to 7 years
and therefore it is not unreasonable to assume that we have another 2-3 years of lackluster IPO demand - Companies are staying private for longer
with alternative exit routes such as GP-led continuation vehicles as the preferred toolkit for the most attractive private companies, giving them and their investors access to the necessary risk capital to drive growth and value creation in the absence of public trading appetite for new listings
References
(1) ROYC Research; Dealogic Data as of 9/30/23
(2) Pitchbook Q3 2023 IPO and S1 Navigator
(3) ROYC Research, Hamilton Lane, Yahoo Finance, as of 9/7/2023
(4) Datto was acquired in on 23/6/2022 in a take-private transaction by Kaseya for $6.2billion
(5) PJT Partners Q3 2023 Secondary Market Insight
(6) The Financial Times, 10/1/23
