It would be a massive understatement to say that 2022 will not be remembered fondly by investors and the Wall Street community. Geopolitical turmoil, the ongoing COVID-19 pandemic, a soaring US dollar, supply chain disruptions, and other factors drove inflation and reduced consumer confidence, resulting in value destruction in the hundreds of billions of dollars. The Federal Reserve was forced to raise rates, driving equity multiples materially lower. The year represented a low-water mark for IPOs over the last several decades.
Yet you can count me as an optimist for the long term. Those of us who have participated in the market and advised companies for decades have seen similar cyclicality. Experience and data show that it’s a matter of when, not if, the market will rebound – and yes, we will return to a more normalized growth pattern and flow of IPOs at some point.
As we turn the corner on this annus horribilis and look ahead to 2023, here are some thoughts to consider:
- A soft landing may be on the horizon. Unpredictable consumer behavior, inflation uncertainty, related interest rate hikes, and recession fears will likely keep the S&P 500 rangebound through Q1’23. As many management teams take the opportunity to lower 2023 consensus given the tentative macro environment when they report Q4/FY’22 results, we’re likely to see a retest of the lows in the first quarter, setting the market up for a more sustained recovery beginning in Q2’23. A continuation of better-than-feared CPI prints could allow the Fed to pause or slightly lower rates by the second half of the year. And assuming no further erosion to the macro, companies should be able to post Q1’23 results ahead of likely cautious outlooks provided to start 2023. Such a scenario would equate to a “soft landing” and may even result in modest multiple expansion.
- Investors and analysts are beginning to turn the page. Most pundits predict a difficult first quarter with continued layoffs, modest holiday season reports, and an unclear outlook of advertiser spend for 2023. But while attending recent banking conferences, we’ve seen an uptick in investors taking a serious, deeper look at individual companies rather than just selling off entire sectors. Moreover, several prominent equity research analysts have turned slightly more positive for the second half as many multiples have been de-risked and cost-reduction initiatives create the potential for profitability improvements later in the year. As a result, tough revenue comparisons should ease in 2H’23 and likely in 1H’24 based on cautious outlooks.
- The IPO window could reopen as early as the second quarter. Stable to improving multiples and a steady volatility index (VIX) in the low 20s should act to reopen the IPO window as early as the back half of Q2’23 and more earnestly in the second half of the year given IPO process lead time. While the IPO/SPAC frenzy of 2021 will not be repeated, a return to a more normalized level of IPOs (and some SPACs) in 2023 could very well become a reality. 2022 IPOs were likely delayed by a year for the most profitable companies and perhaps two years for those less profitable. Companies may elect to do smaller-sized offerings depending on valuation frameworks.
- Profitable companies will be best positioned when the window opens. Many companies were deep in the IPO process at the beginning of 2022. We could see a solid wave of new issues once the IPO window re-opens as these companies merely need to refresh/update their financials with the SEC. Profitable growth companies, those able to satisfy the “rule of 40” (or more) will likely be best positioned for the current environment. There could also be some benefit to companies IPO-ing earlier than 2H’23 as there will be less competition for deals/capital allocation than when IPO activity picks up more meaningfully.
- Market lulls provide a great opportunity to prepare. Companies considering an IPO in the next two years must remember that starting early is key. Every significant IPO buyer wants to meet a company several times before the IPO roadshow. Smart management teams will take advantage of this lull in the market to plan, set messaging, meet with top investors and equity research analysts, and create an IR strategy well in advance of its eventual IPO.
It’s too early to “call the bottom” and macro risk remains high. Many companies with IPO ambitions will be forced to cut deeply which would further postpone public offerings, and we expect high levels of M&A and an active private equity market. A tough year creates an opportunity to reflect, plan, and make the strategic moves now that will result in success later.
Alex Wellins co-founded Blueshirt in 1999. The firm has advised on more technology IPOs than any other agency. Alex has helped guide the IPOs of many Internet, software and digital media companies and has participated in numerous high-profile M&A transactions in the technology sector.
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