The AI revolution has helped fuel the tech IPO sector’s
resurgence following a two-year lull. Our Co-Heads of Technology
Equity Capital Markets join our Global Head of Fixed Income and
Thematic Research to discuss the sustainability of this
trend.
----- Transcript -----
Michael Zezas: Welcome to Thoughts on the
Market. I'm Michael Zezas, Global Head of Fixed Income and
Thematic Research for Morgan Stanley.
Diana Doyle: I am Diana Doyle, Managing
Director and Co-Head of Technology Equity Capital Markets in the
Americas.
Lauren Garcia Belmonte: And I'm Lauren
Garcia Belmonte, Managing Director, Co-Head of Technology Equity
Capital Markets Americas.
Michael Zezas: And on this episode of the
podcast, we'll dive into what's ahead for the tech IPO market
this year.
It's Monday, June 17th, at 11 am in New York.
Diana Doyle: And 8 am in San Francisco.
Michael Zezas: Since 2023 only nine
technology companies completed an initial public offering, which
is one of the longest periods of reduced IPO activity in history.
For context, compare that with the all-time record
of 124
technology IPOs in 2021. But with the first
quarter of 2024 behind us, we're starting to see that picture
improve. With tech and AI in focus right now, on today's episode,
I want to speak with Diana and Lauren from our global capital
markets team to get their take on where the tech IPO environment
might be headed and what investors may want to watch for.
Lauren, maybe to start -- what's contributing to this resurgence
in IPO activity this year?
Lauren Garcia Belmonte: Well, the market
backdrop has been constructive. We've had the SMP and NASDAQ
trading up 10 -- 11 per cent this year and multiples have been
stable for technology businesses. And against this backdrop,
we've seen some IPO issuers recognize that this is a good
environment in which to move forward with their IPO event. There
are several benefits to becoming a public company, not just the
opportunity to raise capital -- but to give liquidity to
employees and to early investors in the business, and to set the
company up to be a real industry leader as a public company.
So, issuers are seeing the opportunity; and meanwhile, the demand
side from investors has been encouraging as well. Investors in
the public equities recognize that there's limited opportunity,
in some instances, to underwrite growth. Right now, 55 per cent
of publicly traded technology businesses are growing top line 10
per cent or less. So, the IPO opportunity, where companies
generally have an attractive growth profile, is a way for these
investors to get access to an opportunity to underwrite exciting
growth profiles -- even when that opportunity isn't so prevalent
in the public markets right now.
Michael Zezas: And Diana, do you see the
rebound in IPO activity as a durable trend? Maybe take us into
2025.
Diana Doyle: Well, 2024 is definitely going
to be better than 2022 and 2023. Now, it'll be a long time before
we get back to that 124 tech IPOs in 2021 that you mentioned,
Michael. But in an average year, we have about 35 to 40 IPOs, and
we expect 2025 to approach more of an average. So, as Lauren
said, we're encouraged by the breadth of investor demand for IPOs
that we've done this year, and investors’ appetite to take risk.
And all that lays the foundation for a healthy IPO market in 12
to 18 months.
But it will be a slow build because IPOs are not a quick
turnaround financing. It takes about six months on average to get
through an IPO process. So, if you're not already underway,
you're likely looking at 2025. In the meantime, we're seeing many
late-stage private companies. They have plenty of cash. They're
doing secondary raises to provide liquidity to employees and
early investors, and they're waiting for growth rates to be more
predictable -- for profitability to improve and to get more
scale.
So, we're excited for 2025, and the IPO market is wide open for
companies that have growth and scale, profitability and that
offer investors something different than what's available in the
public market today.
Michael Zezas: Got it. And what about macro
conditions, Lauren? So perhaps the Fed's pivoting to cutting
rates, the overall economic backdrop, geopolitical
considerations. How do those things impact the tech IPO market?
Lauren Garcia Belmonte: Yeah, absolutely.
The tech IPO market is influenced by these macro considerations
-- and it's in a few different ways.
First, of course, and importantly, the valuation impact is real
for technology businesses that have a lot of their growth on the
come and a higher rate environment. Of course, that future growth
needs to be discounted more significantly. The second key impact
is around just how these management teams are able to manage,
predict, and model out their business.
In a more uncertain environment, it can be more challenging to
articulate and defend the forward model that is a part of all IPO
processes where you're explaining to the research analysts and
investors how your business will perform, as a public company.
And, of course, management teams want to set their companies up
for success as public companies -- and set up for a beat and
raise cadence -- which can be difficult to do when you're dealing
with an uncertain macro backdrop.
I think one encouraging signal -- as much as we haven't seen the
Fed cut as much as people had anticipated as would have happened
at the start of this year -- is that the rate of change has
slowed.
So, the rate increase environment was one of the quickest that
we've seen; and although we haven't seen the cuts as people had
anticipated, I think it's encouraging that that rate of change
has adjusted and that will allow for, hopefully, more
predictability in businesses going forward
Michael Zezas: Got it. That connection
between predictability and rates makes a lot of sense. And it
seems that the market's particularly hungry for AI names. Diana,
what AI related trends are you seeing?
Diana Doyle: Well, AI is this black hole
right now that's drawing all the energy and attention in the
private markets. There's this huge enthusiasm because the
technology is improving so quickly, and there's an uncertainty
how long that rapid pace of advancement will continue. This
cycle, in fact, is an exaggerated version of what we've seen in
prior cycles, where the monetization typically accrues first to
the semiconductors and hardware, then eventually to software. So
right now, a lot of the investment is going into the
semiconductors and hardware, the picks and shovels, and the
fundamental model of research.
But in software, there's still a lot to play out in private
companies to create the type of profitable, proven business
models that public market investors are looking for. There are
big unknowns in how enterprises are going to reallocate spend in
a world of AI, what happens with all the efficiency these new
tools create, how a lower barrier to entry for software creation
impacts margins.
Michael Zezas: And aside from AI, Lauren,
what other areas within tech are seeing more activity?
Lauren Garcia Belmonte: I would say that
these businesses aren't in a particular spot within the tech
landscape, but rather have certain characteristics in that they
share -- namely that they are in attractive markets.
Additionally, being a market leader is of critical importance
today. No longer do people want to back the third, fourth, fifth
player in a market. I think people are really focused on market
leadership. So that one or two spot is going to be really
important. And investors are looking for businesses that are
already scaled. That market leadership typically comes along with
a certain scale qualifier. But that is absolutely going to be an
important feature of the businesses that are successful
transitioning from the private to public markets.
These companies are in the software space and the internet side.
So, there's a diversity of companies that have this in common,
and that could be great IPO candidates on that timeline that
Diana was mentioning.
Michael Zezas: And finally, I'm curious how
the political election cycle might have an impact on IPO activity
during the rest of this year. Diana, what's your read?
Diana Doyle: Well, we do expect to see some
volatility in the pre-election window in the fall, like we do in
every presidential election cycle. But what's different this time
is that we have a pretty good sense, not only of who the
candidates will be -- but also what their presidency is likely to
look like and what policies they're likely to prioritize.
So that de-risks the election as a market event materially versus
prior cycles. And for the IPO market, any company that's been
looking at an IPO in the second half of 2024 has already
evaluated pulling it forward to hit the September-October time
frame and get ahead of that likely market event.
But there's a narrow window for anyone who hasn't yet pulled the
trigger to accelerate. Before the holidays, post-election --
where some IPOs will be able to squeeze in. In practice, most of
the companies that aren't already in the pipeline now -- have
their eye on 2025.
Michael Zezas: Okay, so, putting it all
together, seems you're both pretty confident that there's going
to be a durable pickup in IPO activity.
Lauren Garcia Belmonte: That's right.
Diana Doyle: Yes.
Michael Zezas: Okay, great. So, our
audience should stay tuned. Well, Diana, Lauren, thanks for
taking the time to talk.
Diana Doyle: Great speaking with you,
Michael.
Lauren Garcia Belmonte: Yes. Thank you for
having us.
Michael Zezas: And thanks for listening. If
you enjoy Thoughts on the Market, please leave us a review
wherever you listen, and share the podcast with a friend or
colleague today.
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