The Pipline - West Riggs- Joe Mantone.mp3

Transcribed September 05, 2024

Audio Quality Score: 85%

Joe Mantone   00:00:00

I'm Joe Mantone, an editor with S&P Global Market Intelligence and host of the Pipeline podcast, which examines all things dealmaking. On this episode, we'll hear from West Riggs, Head of Equity Capital Markets at Truist Securities, who will discuss IPO activity in 2024 and the outlook for 2025, West also touches on interest rate cuts and U.S. elections and how they will impact the market. Hi, West, thanks for joining us today.

West Riggs   00:00:29

Good afternoon...

Joe Mantone   00:00:30

August is traditionally a slow month for IPOs. Is that we've seen this year?

West Riggs   00:00:36

That's correct. This year, we've seen no difference for August. We've actually had no IPOs of any size anyway during August. And by that, I mean anything greater than $100 million. The last IPOs we saw were several that happened back in July.

Joe Mantone   00:00:52

And are we expecting to see a pickup in September?

West Riggs   00:00:55

We are. We see IPOs again after an August slowdown. The first 2 weeks in August, we usually see some activity. But this year, due to the volatility in the markets that we saw in the beginning of August, we didn't see any IPOs. The second half of August is traditionally a very slow or no IPO time frame. But post Labor Day, we typically see and we do expect there to be several IPOs to launch during September.

Joe Mantone   00:01:23

So just the market turbulence that sort of gave some companies pause about looking to go public.

West Riggs   00:01:30

That's right. When we saw some of the spike in volatility and some of the market dislocation in the beginning of the month, that gave investors and companies a little bit of pause and cause for concern. But we've come through that volatility, and the markets have stabilized, and the rate environment is improving. And the outlook for the overall markets is actually quite good. So we expect the market to be vibrant come the fall.

Joe Mantone   00:01:57

So you don't think investor appetite has waned at all?

West Riggs   00:02:01

Not at all. If anything, I think investor appetite continues to improve, not at a brisk pace but at a slow and measured pace. We've seen the performance of IPOs so far this year overall performed fairly well. And how I think about that is when you look at the S&P and the NASDAQ, year-to-date performance is up approximately 15% to 20%. And when you think about IPOs as an asset class, IPOs pricing to current on average is up about 20%. And -- so when you think about generating returns, if you're a portfolio manager, you want to be investing in IPOs when they are performing in line or better than the market. And that's what we're starting to see with the IPOs right now. So that's generating growing demand and growing receptivity for the IPOs.

Joe Mantone   00:02:56

So you think that performance will be enough to sort of outweigh some of the volatility that we've seen and we'll see some more IPOs?

West Riggs   00:03:07

I do think so. The one other thing that's giving me increased confidence on a more robust, not vibrant IPO, but a growing IPO market, is that in addition to the performance of, call it the Nasdaq and S&P, we've seen that performance in the broader markets, broaden out from the Magnificent 7, the super large cap companies, out to the Russell 1000 and 2000. So investors are starting to broaden their portfolio out to the mid- and small-cap companies. And those companies are starting to perform well, which is a better corollary to the IPO market.

Joe Mantone   00:03:44

Right? Because those are the size of the companies that we normally see go public, the small cap...

West Riggs   00:03:48

Absolutely. That's right.

Joe Mantone   00:03:50

And of course, the U.S. elections are approaching. Do IPOs tend to slow around the time of elections?

West Riggs   00:03:59

It's interesting. We've looked very hard at this question because every election cycle, presidential election cycle, there's always the worry and the concern about will the capital markets dislocate as we get closer to a presidential election. And we've looked at it several different ways, whether it's a Democrat in office or a Republican in office, whether it's a lame duck president, etc., etc., and we cannot find any correlation to a presidential election cycle and a slowdown or dislocation in the capital markets and in the IPO market itself. There's always a worry and bankers and companies and investors alike track it very closely. But when we look at the data, there really is not a correlation and there's usually not much of a slowdown during that presidential cycle.

Joe Mantone   00:04:48

That's interesting. So it's kind of more of a fun talking point than anything else.

West Riggs   00:04:53

Exactly. We're always being asked the question. And when it comes to the September, October, November time frame, we generally don't see much of a difference in a presidential year versus a non-presidential year.

Joe Mantone   00:05:06

Sounds like from what I'm hearing from you is that we're seeing an improving IPO market. So what are some factors that companies might weigh when considering to go public now or maybe waiting until 2025?

West Riggs   00:05:21

I think it's a couple of factors. One, companies will look at their own performance. obviously. How is their growth currently? And what's their outlook for the next several quarters and ideally one to two years, which is hard to predict but important to have a grasp on. With that overlay, they'll look at the current market environment. And then in addition, it always comes down to valuation expectations. I always look at or right now, I'm thinking about the software industry. In 2000 and 2021, software IPOs were the most active space, and the valuations at which these companies were going public were in sometimes the 20 and 30x revenue multiples. Then when the bubble burst, so to speak, in 2022, those companies and many other software companies sold off dramatically, and they now traded, call it, high single-digit revenue multiples, which by the way, is still very healthy. So when you think about a software company that's evaluating the IPO market, they need to continue to grow, change their business model to think about not only revenue growth but earnings, and then reassess whether or not they want to be going public with a valuation that is depressed from 2020 and 2021, but by all measures, is still a healthy valuation, which would be in the oftentimes high single-digit revenue multiples.

Joe Mantone   00:06:50

So are those valuations, are they good enough for some of these PE-backed and VC-backed companies to go out and go public?

West Riggs   00:06:59

I think so. It becomes company-specific, but the pipeline for PE and VC backed companies is quite strong. A lot of these companies are of scale and continuing to grow and perform quite well. And we've started to see some of these companies tap the public markets. Most recently, there was one company, OneStream, which is a KKR-backed IPO that went public -- and for full disclosure Truist was a book runner on that transaction -- and it did price and it has performed.

Joe Mantone   00:07:29

Yes, I'm sure that's very welcome to the market to see some of these PE-backed companies come out.

West Riggs   00:07:34

Absolutely. And when you get some success on these transactions, it gives the investors and the companies waiting to go public increased confidence to do more deals.

Joe Mantone   00:07:45

What is issuance been like for other products and maybe convertibles or secondaries?

West Riggs   00:07:51

So that's a good question. The convertible and follow-on markets have been very strong. For example, the follow-on issuance is up about 40% year-over-year, year-to-date at about $90 billion of issuance. And the convertible issuance is up about 50% year-over-year at about $50 billion of issuance. And that's important as we think about the IPO market because what we would traditionally see and we're seeing now is: follow-on and convertible issuance will lead the way to a more healthy IPO market. So investors are investing in existing public companies when they want to issue more stock and those deals are being successfully met by investor demand. And as that happens and that continues to happen, then the more risky asset, which would be an IPO will be more well received. We're still, I believe, in the beginning innings of the IPO market rebound, but it's definitely taking shape.

Joe Mantone   00:08:54

So those convertibles and follow-ons are sort of the investors dipping their toes in the water.

West Riggs   00:09:01

That's right. And how the performance of those deals pan out either give increased confidence or gives investors pause. But right now, those deals are working fairly well. And so that gives the investors increased confidence to look at IPOs when they come to market.

Joe Mantone   00:09:19

And from an IPO standpoint, are there any sectors that stand to benefit more from the expected rate cuts that we're likely to see in September?

West Riggs   00:09:29

When we think about the rate cuts, I can't really point to a sector that's going to benefit more than others. I say that because as the rates are expected to be cut, we're seeing a couple of things come into play. One, the cost of capital for the companies will go down, that will benefit all sectors, really, especially those that have higher debt loads than others. But really what's at play is where are investor dollars when moving to when rates are decreasing. And what we're already seeing is investors repositioning portfolios to move slightly some money out of fixed income investments and into equity investments as a chase and position for greater total returns in the future. So what that will do is create more dollars to be put to work in the equity market, which will benefit all companies that are looking to go public.

Joe Mantone   00:10:23

As investors have been moving those dollars over into equities, are there any particular sectors that have benefited more so far?

West Riggs   00:10:33

So far, no, but what I do expect is when I think about and look at the pipeline of companies that we're tracking, we expect that software and life sciences will continue to be the most active sectors in the IPO market. Those in any given year typically make up greater than 50% of the IPO market, and we expect that to continue and maybe even accelerate into 2025 as the pipeline and the amount of sheer number of companies in those sectors that have been waiting for a more robust IPO market, line up to go public. Will there be other sectors that benefit and have activity? Absolutely. We're seeing some consumer in retail. We're seeing some basic industrial companies and real estate companies also. So all sectors are eyeing the market actively. But at the end of the day, the real drivers of the IPO market will continue to be what has been historically the drivers, which is technology and life sciences.

Joe Mantone   00:11:37

And those sectors are historically the drivers. Is it just because of the returns, the potential returns that they offer?

West Riggs   00:11:45

The potential returns they offer, absolutely, and the sheer number of companies that are in the private space considering IPOs. For example, there are -- we're tracking at least 100 software companies that are of scale and have the fundamental dynamics that can be successful public companies. And there are at least that many, if not double, in the life sciences sector, particularly biotech. And when you look at the other sectors, there's just a smaller number of private companies that are positioning themselves for a public IPO.

Joe Mantone   00:12:22

Makes sense. And to sort of wrap up here, thinking about 2024, I mean, has this year been -- has it been on par with what you expected for the IPO market? And as we look forward to 2025, do you think 2025 will be better or worse or more or in line with 2024?

West Riggs   00:12:45

I think 2024 has developed, I'd say, in line with my expectation. So far, we've seen about $25 billion of IPO issuance. That's already more than all of last year, which was about $20 billion, but it's still far behind the years of 2020 and 2021. I mean, 2021, we had $150 billion of IPO issuance. So that was a record year. A steady state year, I would expect $50 billion of IPO issuance. So we're still a little bit behind that. I would expect us to finish in the, call it, $35 billion to $40 billion this year. So we're still in the development and recovery phase after two years of virtual nuclear winter in the IPO market. So this year has been a nice rebound and building the base for what I expect to be a very busy and very successful 2025.

Joe Mantone   00:13:43

So we're expecting to see more activity next year.

West Riggs   00:13:48

We are. We're very optimistic around both the pipeline, the market backdrop and the quality of companies that are looking to go public in 2025.

Joe Mantone   00:13:58

Great. Okay. Well, hopefully, that comes to fruition.

West Riggs   00:14:02

Fingers crossed.

Joe Mantone   00:14:04

All right, West. Well, thanks a lot for your time today.

West Riggs   00:14:07

Thank you.