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While the pace of initial public offerings has remained muted, the mindset of private companies has started to shift, according to Dave Stadinski, global co-head of equity capital markets at Piper Sandler Cos.
Roughly six to nine months ago companies were preparing to stay private longer because they did not have enough confidence in the public markets being receptive, Stadinski said on the latest episode of The Pipeline podcast.
"Some of that's starting to change," Stadinski said. "And if the next class comes forward and has some successful offerings, prices/trades well, has good excitement around it, I think that you could see other companies contemplate moving their timelines up."
The pricing of Reddit Inc.'s IPO along with the success of Astera Labs Inc.'s IPO — both in the first quarter — have increased the excitement around going-public deals. Investment bankers would welcome a pickup in the IPO market. Stadinski noted that the current downturn in the capital markets has already lasted seven quarters, one quarter longer than the drop-off that plagued the markets around 2008 and the Great Financial Crisis.
The current downturn has lasted longer in part because there is less of a need for companies to raise money, since so many tapped the capital markets in 2020 and 2021, Stadinski said.
But Stadinski has noticed that activity is beginning to improve, and convertible issuance is leading the way. Convertibles typically recover faster than other capital markets products because the pricing of those deals takes volatility into account, he said. Also, developed companies — as opposed to earlier-stage companies — tend to issue convertibles, and having the established trading market along with a known business model helps attract investor interest.
"The speed coming to market really underpins that as an instrument to lead the way out of periods like we've been in," Stadinski said.
After convertible issuance rises, follow-ons tend to start recovering, and then IPOs are last to pick up. Stadinski said a key to a company executing a successful IPO is listening to investor feedback gleaned from the late-stage private company meetings as well as test-the-water meetings.
"Is the story you're telling being heard in the manner you intend?" Stadinski said. "Are there any mid-course corrections and how the story's being positioned?"
It is much more common for investors to take part in an IPO if they had a chance to meet with the company's management team ahead of the road show, Stadinski said. "The information that a company can learn — and its advisers — through all those impressions leading up to the [IPO] is a really critical point in learning how you can bring together buyers and sellers," he said.
A common theme among recent IPOs is that companies have good indications that a group of investors is interested in taking part in the deal. Often, that so-called "pre-identified demand" comes from existing shareholders in the private company, Stadinski said.
Having that backing gives management teams more confidence that the IPO will be successful. However, a risk of having too many existing shareholders is that it could serve as a deterrent to new investors who think they cannot obtain enough shares to make the effort of evaluating the company worth their while.
Stadinski said it is important to get the balance right between new and existing investors. "You want to have some confidence going in, but you also want to have enough new shares available so that you can fill out your order book with a high quality group of investors," he said.