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Mark Mulroney: Welcome to Market Points. I'm Mark Mulroney, Vice Chair in Global Banking and Markets at Scotiabank. It's a pleasure to be here today. Thank you all for making the time. On this episode of Market Points, we're covering investor perspectives on the IPO market ahead of us in 2025. I'm joined by my colleague and friend, Pete Gordon, Director, Technology, Equity Capital Markets.
Peter Gordon: Thanks for having me.
MM: We just closed out a strong year of equities in '24, and it appears we're poised for a strong '25. What is the overall sentiment in the IPO market, and what's driving that interest? What are you hearing? What are you seeing?
PG: We just closed out an IPO survey where we talked to investors with over three, four trillion in assets. Feels though we have a really strong sense for what investors would like to see in the upcoming IPO market. Key takeaway here is risk taking sentiment has moved from medium to high risk over the past six months, which is great news for the IPO market. So, we're expecting a busy 2025.
MM: Gee, has something changed? Is it a risk appetite, rate cuts, U.S. elections? What's doing it?
PG: Yeah, I think you covered it there. The other thing that has kept a lot of private companies on the sidelines is just the proliferation of private capital.
We've seen private capital almost equate to the amount of public equity capital that's being deployed. Now that risk sentiment in public markets is starting to improve, we expect the amount of dollars being deployed in public markets to get closer to the amount of private capital that's out there.
MM: So, private capital plus risk on from your seat as you're seeing it, how does it play out in 25?
PG: Yeah, we expect the larger, more scaled businesses to go public first. We need these transactions to go well. They need to be a win-win for both the issuer and investors. In other words, strong aftermarket performance. The other thing which is likely to push private companies off the sidelines and into the public markets is the underlying LPs that own these businesses through private equity or VC.
They have certain returns that they need to make to their investors. And so, if those businesses are not sold, they'll likely be pushed into the public markets. We've already seen a few of those go public in the U.S., and beyond that, in the back half of the year, you'll likely see a wider dispersion of scale of companies come out to the market.
MM: Well, the godfathers of tech were all sitting front row at the inauguration. Obviously, what we're seeing right now when it comes to the "Buy America", risk-on type attitude, can you already feel it in the stocks that are out there?
And then when you think about IPOs, do you think that's going to translate in more of a bid for that market?
PG: Yeah, absolutely. The one thing that investors like is precedent. We've already had one Trump presidency during which there was a very healthy volume of IPOs, and we would expect the same during this presidency.
MM: So, we've talked about the macro. Let's talk a little micro. If we wanted to get a little granular here and you want to talk IPO discounts, what range are investors currently expecting if they are to bring their company public in this particular market and backdrop?
PG: Well, the traditional discount is 15% to 20% and that's where we're at right now, which is a great sign for the IPO market. We want things to be normalized. We've been in a period of time where the IPO market has been a little bit more challenged and IPO discounts have been a little bit wider.
So now that we see things tightening, it's a great sign for issuers and it's a good time to come to the table and have some discussion with investors.
MM: If we think about this in a particular way, and we think that maybe we're at the beginning of a game, maybe we're second inning. You know, a lot of times you start to see this market pick up and then it, it snowballs, and you start to see more and more companies come.
What's the change this time in terms of liquidity? You know, sometimes you used to say, Oh, you need to bring a billion dollars, at least a billion dollars of float to the market. How are you seeing that? Like, obviously when you think of cornerstone investors, how investors view those people coming in, those types of investors coming into the trade, how are you looking at that from your seat in ECM on the technology side?
PG: Right, well, float and cornerstone are interrelated.
The billion dollar figure has definitely come down. That being said, the actual size of the IPO needs to be large enough for traditional investors, large mutual funds to build positions at IPO and in the aftermarket. So, I would say that numbers probably come down to, say, $500 million for smaller companies, but a typical large scale proven business going public with a billion dollar float is definitely a healthy sign.
During 2022, 2023, when the IPO market was a little bit more challenged, the idea behind the cornerstone was to de risk the transaction. And now that risk taking sentiment for investors has actually improved, we expect the use of cornerstone investors to diminish a little bit.
That being said, cornerstone investors are fantastic. They validate the investment thesis of the IPO. They can send a strong signal to the rest of the market. There's nothing wrong with a cornerstone investor, it's just that the rest of the investors at IPO would like a larger allocation basically, and if it all goes to the cornerstone, that doesn't leave much for them.
So, in order to see investors build positions in the aftermarket, they need to have a meaningful allocation during the IPO. So, a smaller cornerstone actually enables the rest of the public market investors to basically build in the aftermarket, and that really just helps the aftermarket performance of the stock.
MM: And it's not just demand, right? If a cornerstone investor steps up, says they had a look under the hood, says that they back this particular company going public. I mean, obviously that's a bit of a seal of approval as well, right?
PG: Yeah, absolutely. The feedback that we've gotten though really varies. So, it's not necessary to have a particular tech investor on the cover of an IPO. As long as they're high quality, I think it's a good sign. It's not necessarily as meaningful as it was say a couple of years ago.
MM: I guess one thing that these people will also think about is leverage.
You know, depending on some of these companies, they took on more leverage depending on how long they stayed private for, or the longer time that they actually incubated in those private markets, what's the leverage profile for an investor targeting for an IPO?
PG: Well, survey says two to three times, but the key thing here is management needs to be able to talk to investors during the roadshow about how they're going to de-lever post IPO and or use the proceeds at IPO to de-lever.
That really comes down to management credibility. If you're a company that has a management team, which has already proven that they've done this in public markets, that's going to be a lot easier than a management team that's coming in for the first time, has never proven that they've de-levered.
So, what we're seeing is companies de-lever pre-IPO, and that's where private capital markets are coming in. They're writing a big check from an investor to bring that leverage metric down to a number that's much more palatable for public market investors. So, as we continue to see the IPO market continue to reopen, we'll likely see these pre-IPO rounds just bringing leverage down as well.
MM: So, you've said a few things here, obviously, that are important. You've talked a lot about the survey. What's the survey actually saying here when it comes to timing? What are investors anticipating for the IPO market in '25?
PG: Yeah, I think the survey is saying, well, we expect some activity in Q2 to be meaningful. We've already had some activity in Q1, which is great. Some of the larger, more scaled businesses like we talked about earlier have already come out to the market. We've had a little bit of mixed performance, which isn't great for the overall sentiment, but we're still well below normalized levels in terms of IPO issuance and particularly tech IPO issuance.
The thing about the back half of '25 is that when you're marketing the transaction, you'll actually be able to look to half of the year that's behind you, and that gives you a better sense for where you're going to end up at the end of the year in '25. You'll also be able to forecast based off where you expect in '26. So, long story short, we expect more activity in the back half of the year for technical reasons.
MM: So, what are the main risks to the IPO market as you see it, according to investors?
PG: According to investors, it's mispricing. Which really means just deals pricing too rich, as well as deals not getting enough liquidity like we talked about earlier in terms of cornerstones and allocations to transactions.
So, what we really need to have happen here is the IPO market to be a win-win for both issuers and investors. So, we need, you know, that 15% to 20% IPO discount so that you see a strong first day of trading. In fact, most transactions that don't trade up on the first day end up having a challenged aftermarket performance in the long term.
So, it's really in the best interest of the management team to make sure that that very first day of trading goes well for everyone.
MM: Pete, I know we already kind of delved into this earlier, but what do you think the ideal float is for investors looking for an IPO?
PG: Well, investors would love as much float as generally possible. But based on precedent, we likely see around 10%, and that's a good sweet spot in terms of what's best for the issuer and what's best for the investor.
MM: Not to put you on the spot here, but as you're thinking through sectors and the backbone that is technology, because technology is no longer just a vertical, obviously it's a horizontal that cuts through everything.
What are the actual areas within tech that you think will be the most prominent as we sort of push forward here into that Q2 that you're expecting a little bit of a rush?
PG: Yeah, I think I might have had a different answer for you a couple weeks back before the Deep Seek news, but what that's done to the software ecosystem is actually pretty interesting.
So, there's a perception that LLMs, or large language models, could become commoditized. This is actually a good thing for the software companies that are sitting atop the LLMs because the margin expansion from cheaper compute, cheaper LLM training costs is only going to accrete to the software companies, like I said, sitting at the top of that vertical.
And so, this is actually a really positive thing for all the meat and potatoes software companies that are waiting in the wings to go public. We expect margins to get wider. And it'll actually become a very positive tailwind for the broader IPO ecosystem.
So, to go back to the survey and tie this into what I'm expecting for 2025, we expect healthy amount of float for IPOs coming out. We expect healthy amount of IPO discounts. Investors are getting more comfortable with leverage but are still a little bit on the medium side, in terms of how much leverage they'd like to see at IPO. Risk is much higher than it's been in the past six months, and there's a lot of tailwinds for this overall industry.
Yes, there's a little bit of volatility, so it's very important to be very savvy and trust your bankers in terms of what timing winners are out there. But everyone should get excited for a busy '25 even busier '26. We're very much looking forward to the year ahead.
MM: Well, that's great, Pete. That was extremely positive. And I love it. That's it for today's episode of Market Points. Thank you for tuning in and be sure to join the next episode for more in depth analysis and discussion on the latest trends in the financial world.
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