Shutdown Ending Could Spur 'Flurry' of IPO Activity

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Watch Shutdown Ending Could Spur 'Flurry' of IPO Activity - Bloomberg on Dailymotion

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00:00So the SEC pretty much in limbo right now. You've seen some planned IPOs get put on the sidelines

00:06beyond just the logistical nature here. Companies not necessarily being able to go public.

00:12What does this mean for sentiment at this moment for some of those IPO candidates who have been

00:17waiting for their turn for a while here? Well, Katie, first of all, thanks to you and Romain

00:23for having me back on, particularly for the negative segment. But I think it really doesn't

00:28affect the long term sentiment of the market. I think it's an annoyance. I think as companies are

00:32gearing up to pursue their IPO path, only to be sort of halted for the moment by the government

00:39shutdown. That's not something that anybody loves. But I think the reality of it is we've seen such

00:45strength in the IPO market this year when compared to last year and certainly the year before that.

00:49We've got twice as many tech IPOs this year in nine months versus what we had for all of last year,

00:55four times the amount of capital raised in the tech sector this year so far versus last year.

01:01The markets are clearly open from an investor perspective. As long as the government doesn't

01:06delay or keep the shutdown for a very long time, I think that as soon as things open back up,

01:13people are going to be ready to go again. The last time we had a shutdown like this late 18,

01:18early 2019, about 35 days, it certainly put a halt to the IPO process and companies looking to come out

01:25at that time. But as soon as the government shutdown was put to bed, there was a flurry

01:32of activity. And frankly, I'd expect we'd see that again this time around.

01:35All right. So waiting for flurries here. But Ted, you make a good point that we've seen

01:39a lot of tech IPOs. That seems to be the bulk of it. We've seen a lot of crypto

01:42IPOs as well. So the fact that it seems like the new entrants into this market have been

01:47pretty concentrated in those two buckets. Does that say anything to you at this point?

01:53I think it says that the public market investors generally who are continuing to seek growth,

02:00growth is still the watchword for investors, certainly in tech and crypto. But more generally,

02:05they see these areas, they see things that are infused with AI at this point in time as being

02:12interesting, the way to achieve their long term return objectives. And so the fact that you've seen

02:17a lot of those companies come public is really just the underwriters and the companies themselves

02:22giving those public investors what they say they want, growth and exciting large market opportunities.

02:29I am curious about the path for some of these private companies. And when we talk about sort

02:34of this idea of how mature some of these companies are relative to past cycles, I am curious whether

02:39that that actually ends up being a little bit more of an asset when they do finally actually hit

02:44the IPO market relative to in the past.

02:48I think it certainly does. I mean, that's a really good point. The reality of it is,

02:52and at the intro, you're talking about private for longer. The more capital that these companies

02:57take from increasingly later stage sophisticated investors, the more demands are placed in the

03:03companies to begin to think and act like public companies, managing themselves to quarterly reporting

03:08cycles, expectations for profitability and increasing profitability over time, more repeatable and

03:15sustainable revenue growth. All those things that are very difficult to achieve for an early to

03:19mid-stage private company can become more attainable for later stage private companies. And if they're

03:25held to that standard, then to your point, I think once they become public, it's a little less

03:29jarring than it can be for an earlier stage company that's all of a sudden flooded into the public

03:34market.

03:34There's also been a lot of talk when people sort of raise this question as to why some of these

03:38companies would even bother with the public market, at least particularly for those that are

03:42generating pretty decent cash and even maybe profitability. One argument that I've seen posited is

03:48this idea of growth through acquisition and the idea that it's going to be a little bit easier to do that

03:52if you have public stock as your currency, more or less.

03:57We certainly continue to see stock being used in some M&A deals within the tech sector. I don't

04:03think that goes away, although the bulk of the strategic transactions that have happened in tech

04:08over the recent past have been cash-driven as opposed to stock-driven. So it's not exclusively about that.

04:14Certainly, greater liquidity for existing investors and employees is always a big factor when you think

04:20about the potential for an IPO and having a liquid currency. So I think if these companies are able to get

04:26public as we're suggesting here now, having that currency for M&A is certainly a positive, but I don't

04:32think it's required because with all of the additional cash and the investors desiring to put more cash to

04:37work in these large-scale private companies, there is still an opportunity to do M&A. They just have to use

04:43the cash as funded by the investors that are coming in.

04:45And, Ted, when it comes to M&A, specifically tech M&A, you make a really interesting point in the notes that

04:51you sent over to our producers that you take a look at volume and deal count for larger transactions.

04:56It's up year-to-date by both metrics. But then you take a look for those smaller transactions, less than $1 billion.

05:04That's actually down year-to-date or year-over-year. And I wonder what that says, that it's more the bigger

05:10ticket deals that seem to have more interest versus maybe some of those smaller combinations that you

05:16might think would be easier to get done.

05:19Yeah, the data are really interesting around that. And as we try to parse through that, I think there are a

05:23couple of things to learn. One is that in the current regulatory environment, leaving aside the

05:28government shutdown component for a moment, there is a belief that some of those larger deals are easier to get

05:33done than they might have been under the previous administration. And so some of the deals that

05:39may have been pent up for a while that were larger are believed to be able to get done. Again, to my

05:44earlier point about AI, some of those transactions by their very nature are just large. They're north of

05:49that $1 billion line that you've mentioned, Katie. And so as those deals start to get done, they creep up

05:56and well into that larger deal scenario. I don't think it's fair to say that because there are fewer

06:01smaller deals in terms of number or dollar volume this year that there aren't any or there's not

06:06meaningful M&A activity below the $1 billion line. We've seen a lot of that and continue to see a lot

06:12of that. And I think this year, by the time we get to the end of the year with a strong fourth quarter

06:16will at least be on par with last year. But there's no doubt that those larger deals that have gotten

06:20done and are able to get through the regulatory process have dominated this year versus the smaller

06:26deals.

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