Investment banks do their best to anticipate spikes in volatility. After a record-breaking 2021, ECM bankers were prepared for a slump in activity and the consequent hit to fees.
But for a business like equity capital markets, which relies more than any on sentiment and predictability, downturns cannot be managed purely by simulation. And models likely did not account for a war in the heart of Europe – which led the VIX to hover around 30 for the best part of March.
Bank revenues from equity raises have collapsed to a combined total of USD 642m so far this year, down 89% for the same period in 2021, Dealogic ECM data shows. Revenues from the usually lucrative initial public offering market (including SPACs) are down 92% for a total of USD 266m year-to-date, representing the leanest start to the year for IPO-derived revenue since 1Q16.
The ‘big five’ – Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America and Citigroup – have pulled in a cumulative USD 101m in revenue from US-domiciled IPOs year-to-date. By this time last year, the same banks had generated some USD 1.84bn through the product.
After a year of issuance that helped to propel banks to a new record for overall investment banking revenue, the meager harvest for IPO fees is matched by a dearth in blockbuster listings synonymous with the boomtime of US stock markets. Of the 16 non-SPAC listings seen on North American exchanges so far this year, just one – private equity firm TPG’s [NASDAQ:TPG] USD 1.1bn flotation in January – has broken the USD 1bn value threshold.
“ECM issuance is cyclical, so it’s important to remain focused on companies’ long-term objectives,” said Paul Abrahimzadeh, Citigroup’s Co-Head of Equity Capital Markets for North America. “The slowdown in new issue activity has afforded more time to meet with clients and understand their corporate finance needs, better enabling us to structure capital raising solutions.”
Picking the moment
Determining the ‘right’ moment to push ahead with an IPO is about as nebulous as determining the point at which an issuance window opens and closes. For high-growth, low-to-no profit companies, seemingly out of favor with investors conscious of rising interest rates, that decision could prove more onerous.
“For any meaningful issuance window to open up, there needs to be some kind of resolution in the Russia-Ukraine conflict, as there is capital camped on the sidelines,” said Citigroup’s Abrahimzadeh. “There also needs to be clarity on the interest rate regime, with as many as six hikes still to come in the US this year. This is a new dynamic that the highest growth parts of the market need to navigate.”
What’s clear is that these are times that seem to buck expectations. Many market debutants measure their readiness to go public against how likely it is they will see day-one pops, but even the wider stock market indices are offering few clues. The Nasdaq 100 lost around 20% between January and 14 March. Since then, the tech-heavy index has rallied more than 14%.
The traditional post-Easter issuance window may come and pass, but bankers say their clients are focused on readiness should an opportunity arise.
The fate of second quarter IPOs could eventually fall to the feet of just one issuer – a first mover – whose quality and size could skew the investment landscape back towards risk-on. Digital bank Chime, Microsoft [NASDAQ:MSFT]-backed software maker Databricks and grocery delivery service Instacart are among the names on Mergermarket’s watchlist.
This time around, though, there will be a starker difference: valuations. Gone are the astronomical multiples paid by investors during 2021, bankers say.
“Issuers will also need to become acclimated with the new valuation paradigm. There is perhaps a degree of sticker shock from some boards as they compare today’s market multiples to the record valuations paid by investors last year,” said Abrahimzadeh.
Such is the cyclicality of ECM that one would be forgiven for thinking we’ve been here before.
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