A quick look at 2023 exits
2022 was a rocky year for IPOs. In the US, the only market we care about, the number of IPOs fell by 76% and proceeds down by 95%. And look at the Renaissance ETF IPOs; they were down more than 50% over the last year.
The Fed is doing exactly what it said it would do, right? They have to make sure that everybody out there understands that they will cure the surging inflation. So, it's not surprising to those in the market who have been around for a while.
If you traded in the market for a while, you know what happened in the 1970s: the Fed took its foot off the gas to crush inflation.
This Fed chair knows that story, so he could continue to talk down inflation by remaining hawkish. And that is exactly what happened—exactly what we thought would happen—but we rallied through it, which means a lot of that was already in the market.
The market is a leading indicator, and the Fed is a lagging indicator. The Fed will wait for confirmation that you're seeing the slowdown they expect to happen before taking its foot off the gas again. The market will price that in, as it has always priced it in.
You know, even though there was no Santa rally, there was a fourth-quarter rally, and why? Because the market is pricing in the likelihood of settling out ultimately at a much higher level, and that’s okay. It's pretty good.
So, does that mean we're going to see IPOs this year?
It's hard to argue that it will be the same as it was in 2020 and 2021, we may just go back to 2018 or 2019 levels. I think we could There are more than 100 companies that have selected bankers in the backlog waiting. And I don't think there needs to be a Fed pivot for that to happen. There just needs to be a significant sign that inflation is abating and that the Fed is going to stop raising rates. At some point, I just think it must be enough that the Fed is not raising rates, and I think this market today kind of indicates that.
There was one meaningful billion-dollar-plus IPO, Mobileye, last October, and it traded up well, but with only one, it's hard to say that this year is going to be worse than last year. So, if you're looking for a silver lining, I think last year was rocky and rough; this year, it's hard to see how that gets recreated because we just know so much more about how things are going to settle down.
As late-stage investors, we also look at M&A as a way to exit our investments.
M&A volumes have picked up again. We've seen a bit of a rally in the fourth and the low in M&A, and I think we could get again to levels that we saw in 2018 and 2019; I think very much more selective, though. I think there will be certain types of deals that get done and other types of deals that won't get done. If you're sponsored, deals are still being done, and lots of money is spent on the sponsored segment. If you've got good cash flows, financing in this environment is easier; private financing is still much more available than leveraged lending. So those kinds of deals, middle market deals, are getting done. What's not getting done if you have a cash shortfall or your business model requires a deal because it requires margin improvement to meet the numbers? People aren't doing those. Why? Because they don't have to unless it’s priced right.
And that's the last thing I would say. I think we're finally starting to see it both in the IPO market and the M&A market: formerly high-priced valuations of private tech companies are coming down 50 to 75% on their next rounds to match what's happened in bellwether names like Tesla, which is down 70%. You can't tell me that your tech company, which is a private company, isn’t down or isn’t down meaningfully, and I think that's kind of what's happening; that's starting to happen to a certain degree in the private market.
People who need to raise money reach a point where they just say, “I need the money, and the valuation is less important.”
The message is that valuation is less important in this difficult, dicey environment. I tell my portfolio companies to get their money and execute their long-term business plan as well as possible.
We wish you a great 2023; just don’t expect too many exits.
