Q&A: Taking Stock of the Slow IPO Pipeline

One of the more intriguing elements of the capital market environment is the initial public offering (IPO) market. How the market has performed, what firms are saying about the IPO landscape and pipeline, and the macro factors that could fuel activity are all top-of-mind. Gina Kashinsky, Managing Director, Equities Head of Global Markets Group at S&P Global Market Intelligence, sat down with a few teammates to ask for their thoughts in a recent webinar.

Joe Mantone – News Desk Manager, U.S. Financial Institutions (S&P Global Market Intelligence): For a good stretch of time between the start of the pandemic and now, the IPO market has been propped up by special purpose acquisition company (SPAC) issuance. But we have seen SPAC IPO issuance really slow down this year, and that's taken a good deal of wind out of the IPO market’s sail.

Global market volatility has influenced a drop-off in traditional IPOs as well. The volume of new global IPOs is tracking down 53% year over year in terms of total deals, and 70% for the total value of those transactions. The IPO markets in U.S. and Europe have slowed substantially, given their respective geopolitical concerns. Year over year, SPAC deals are down about 80% in the transaction total and 90% for the total value. Additionally, the deals that are happening in 2022 are much smaller than what we've seen in prior years.

In terms of sector performance, the energy sector is the one that’s showing a bit of growth in total IPO market value during the first half of the year. But the number of deals in that sector is down about 40% year over year, so best performing sectors are down. The IPO market was pretty strong coming into the year, but it's really slowed down quite substantially.

Chris Sztam – Managing Director, Head of Global Markets Group (S&P Global Market Intelligence): Our conversations with issuers and sell-side firms have revealed that there's a fairly decent pipeline of IPOs. It's been hard to get these deals brought to market because of the risk aversion that investors seem to have taken on over the last 4 or 5 months. Of course, there’s also been a material correction in equity valuations.

Another thing we’re monitoring as we head into the earnings season: average share prices and the price/earnings ratio have come in quite a bit, but it's still an open question on earnings. Since we saw a few announcements in early June from some issuers about discounting and markdowns, earnings are still an unknown element.

Mark Moss – Head of EMEA Desktop Business Development, Financial Institutions (S&P Global Market Intelligence): What I'm hearing from clients around market participation is that they feel the IPO market is essentially shut until September, where hopefully conditions will have improved to allow for that pipeline that you mentioned, Chris, to start moving again.

I’ll pick up on Joe's point around SPACs. Customers that I speak to describe it as a bubble that's burst. When you consider the advantages of the SPAC model for an issuer – cheaper, fewer fees – and compare the cost of European IPOs versus U.S. IPO, the former being the more expensive, you could see why SPAC activity was huge in the U.S. compared to Europe. The appeal of that route makes sense, but it’s easy to see why firms in the capital markets have backed off from it.

When you assess the poor aftermarket performance of those companies that went public through SPACs, there’s a sort of track record to which we can now refer – especially regarding their financials. Most of the firms are in the tech, biotech, and SaaS businesses and posted great revenue streams and growth in their private market post-money valuations. I think that's fueled by all of this dry powder that sponsors have had to deploy amid the competition for assets. In turn, that seems to have inflated valuations on the promise that those businesses had an easy route to profitability.

Paul Gruenwald – Global Chief Economist (S&P Global Ratings): I’ll wrap up with some macroeconomic context. To instill more confidence in the market, we want to see consumer spending increase. We've noticed a ton of volatility around trading, investment and inventories, and several similar metrics. However, consumers, particularly in the U.S., were still spending in the first quarter and beginning of the second quarter.

With all the uncertainty we're seeing around inflation, the Russia-Ukraine war, supply chains, and Chinese growth, all the capital market trends you highlighted soundly resonate for us too. Ultimately, I think it's going to be a while until we get clarity on all of the macro elements. Until we get clarity, consumers are going to hold back on spending. In addition to the uncertainty, another big question is whether the bottom will drop out of the employment market. Once the questions around broader macro uncertainty and employment are answered, people should be more confident and start to spend again. If they're spending, then that feeds back into the earnings part of the equation. So, I think we're seeing the same thing from 2 different sides of the fence.