This year the IPO pipeline was expected to be robust again, on the expectation of a business environment with reduced regulations and lower tax rates on the horizon.
Instead, the IPO pipeline seems to have largely come to a halt as soon as it began to look like large deals (tech, and biotech, in particular) were due to resume.
In this context it’s important to realize when and why deals are completed.
When a company goes public, essentially what this means is that a controlling shareholder (or group of them) is making the decision to exit a large position that they currently hold in the entity they are trying to take public.
In essence, they have a concentrated stock position and are going through an auction process to sell a large portion of the position on a single day, at a single price.
Of course, they won’t sell their entire position in the company, nor would other investors want them to completely exit their full position. How come?
Put simply, other investors buying into this company would want to see that the sellers have some remaining skin in the game.
After all, if someone wanted to urgently sell their entire stake in an investment to someone else, it would prompt the buyer to ask why there was urgency to exit the investment completely.
So, if the existing buyer didn’t want to own even a little piece of that company, one could reasonably infer that the current owner believed that it was no longer an attractive investment.
Alternatively, if the current owner wanted to sell part of their stake, thereby reducing the size of their concentrated position, it would be reasonable to believe that the original owner simply had too much money tied up in a single investment and wanted to take some profits, but didn’t want to completely exit because there was still meaningful upside ahead.
Also, keep in mind that private market investors who fund, acquire, and later bring companies public eventually need to return funds to their investors who have had money tied up for years without the ability to access most, or all of it.
Moreover, the white-hot IPO market of 2020 to 2021 remains seared in the minds of many investors. Not just for the avalanche of funding and dealmaking that occurred when market conditions were strong, but also for the ensuing headache that followed when inflation got out of control, prompting the federal reserve to rapidly increase interest rates to slow inflation, and the following sharp decline in the stock market (and recent IPOs at the time even more acutely so).
To get past the IPO pipeline slump, and return to normal levels of activity, we will first need to see evidence of a sustainably positive economic outlook (hint: little to no concern of recession, or problem inflation), and economic policy that is both consistent and peripheral (i.e. in the background, where investors prefer that it would remain).
Until these criteria are present, it will be challenging to see a consistent flow of new IPOs as buyers and sellers alike proceed cautiously due to an unclear economic outlook. To be clear, this is not to say that the economic outlook is decidedly negative, but instead that there are numerous factors that continue to frequently change, or remain undecided.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.