Taking the pulse on the IPO landscape: Part 1

The time before and after an initial public offering (IPO) is full of anticipation. For companies that are ready to offer their shares of stock to the public, this process is an inflection point that can move the entire trajectory of the business forward. The following conversation clarifies where the IPO landscape is today, how we got there, and some prognostications about where it is headed.

The perfect pairing for this discussion brings Jennifer Flynn, Senior Global Capital Markets Director at Broadridge Financial Solutions, together with industry leader Yvan-Claude Pierre or “YCP,” a partner and leading public offerings counselor at Cooley LLP. YCP has over 25 years in practice advising clients on hundreds of public offerings, mergers, acquisitions, and other significant corporate transactions across the U.S., Europe, Australia, and Asia.

Jennifer Flynn: YCP, it’s great to catch up with you. To set the stage for our audience, can you briefly summarize how you see the rest of 2024 unfolding?

YCP: Currently, we are seeing a slight uptick in IPOs this year benefiting from an improved fundraising climate. It appears that the financial markets are gearing up for more IPO debuts after two years of limited activity due to high interest rates, market uncertainty, and geopolitical conflicts arising around the world. In the first quarter of this year, IPOs showed modest signs of a recovery, with 49 U.S. IPOs through March 31 compared to 33 IPOs during the same period last year. As a result, we are seeing growing optimism for more IPOs as we move into Q2 2024. Most recently, all eyes were on the Reddit IPO for signs of whether the broader market, particularly the technology sector, was opening. Reddit’s debut was well received by investors, priced at the top of its range, and shares rallied in post-IPO trading activity. Although inflation remains high, there continue to be indications that interest rates are stabilizing and will possibly even fall later this year after the summer, which would be beneficial for the IPO market. While challenges like geopolitical uncertainty and a potentially divisive presidential election aren’t going away anytime soon, IPO activity seems to finally be poised to cautiously open back up after a significant backlog with a “wait and see” mentality.

Jennifer: With that context, I would like to kick this off by having you share some of your story and background in this space which will ‘set the table’ for the rest of our conversation.

YCP: Of course. I started my career about 27 years ago, of which ten years have been with Cooley. I was previously the global chair of the corporate department at another AmLaw 50 law firm. More recently, I led Cooley’s efforts in entering the Midwest market during the COVID-19 pandemic. We entered as the first global Silicon Valley-founded firm that is the leading law firm in the technology and life sciences sectors. These efforts resulted in our opening of Cooley’s Chicago office in 2021. We decided to open because we believed, based on market data, that there was, and continues to be, a tremendous long-term opportunity in the Midwest for the tech and life sciences sectors in all areas that we practice, including IPOs.

Cooley is a leading firm in capital markets. In 2023, we worked on approximately 83% of all U.S. healthcare and life sciences IPOs, and we have also been ranked number one for issuer-side IPOs since 2016 until now. In 2023, we were again named Capital Markets Practice Group of the Year, a recognition that we have received many times.

I completed my first IPO, IXNet, in 1999, and I was hooked. Since then, I’ve really loved working with companies that have innovative and disruptive technologies in the tech and life sciences sectors. I would attribute my success to my personality and my style of lawyering, which allows me to work exceedingly well with management teams and boards. I strive to authentically tell their stories in a way that’s also very clear to investors.

That being said, I also believe that I wouldn't be where I am today without a brilliant team of lawyers who’ve worked with me throughout my career to execute these IPOs at Cooley and elsewhere.

Jennifer: Well, I know you always have your finger on the pulse of the IPO market, so how would you say the IPO landscape has evolved over the past few years?

YCP: To better understand how and why the IPO market has evolved in recent years, I think it’s important to look at how many were completed in the past few years — and how their performance played out.

418 IPOs in the United States in 2021
40% of the companies that went public in 2021 had a billion-dollar valuation, but are currently trading under $500 million
38 IPOs raised $1 billion or more in 2021, compared to only 2 in 2022 and 3 in 2023
91 IPOs in 2022, and 128 in 2023, with capital raises up 8% year-over-year

Numbers aside, I would also add that last year's IPO market was particularly notable. Not just because it was another slow year but also because valuations weren’t supported as expected. The three largest IPOs in 2023 were semiconductor manufacturer Arm Holdings, consumer health company Kenvue, and footwear maker Birkenstock. Even though those IPOs raised large amounts, they all had challenging market performance after their IPOs, which raised concerns for investors and market observers about the market’s strength, so the tailwind that we expected never materialized.

Conversely, the 2023 gains that did materialize were very heavily concentrated in mega technology stocks, like Nvidia, which really drove some indexes higher and continues to do so. However, the remaining indexes, such as the IPO index, could not match the mega-cap disproportionate outperformance, which attracted investor attention away from the IPO market and instead into mega caps as investors chose proven names versus unproven new market entrants in the face of uncertainty. Given the fragility of the private markets last year, it is understandable, exacerbated by more than 3,200 venture-backed startups that shut down.

We also need to acknowledge that other factors, such as the aggressive tightening of monetary policy, have obviously affected IPO activity. When Central Banks have persistently high interest rates, it reduces liquidity and increases financing costs, deterring risk-averse equity investors and discouraging companies from going public, which was another big challenge. Given the recent inflation data, we are not out of the woods on further tightening, although it is unlikely.

Jennifer: With such divergent numbers, it’s not surprising that companies would be tentative when it comes to entering the public markets. In your opinion, how are things looking in 2024 for IPOs?

YCP: I continue to believe that the IPO market will modestly open back up during the rest of 2024. We continue to see a steady stream of IPOs like Reddit, Astera Labs, Auna, and Boundless Bio, to name a few, in March. In addition, we at Cooley priced Rubrik last week, and UL Solutions, PACS Group and others priced their IPOs in April. We are also expecting long-rumored companies like Databricks, Turo, and Stripe to enter the market alongside a pipeline of more than 400 companies eager to enter the public markets.

Politically, there’s also a lot going on. We have the presidential election, congressional budget fights, wars in Ukraine and Gaza, and the increasing tension in our relations with China. On top of all of that, we have the overhang of $46 billion in investor losses arising from Special Purpose Acquisition Company (SPAC) transactions. And yet, even with all that in the background, we’ve still had around 50 IPOs so far this year, mostly in the life sciences sector. Cooley has been fortunate to be involved in two of the ten life sciences IPOs, which has been exciting.

Jennifer: I bet. I really appreciate you taking the time to share your view on how you see the market unfolding. It’s such an interesting topic.

YCP: Things are always changing in the world of IPOs, which makes it exciting. Because of that, there’s always something to learn.

As the world of IPOs continues to evolve, it’s important for leaders to stay informed. This initial conversation is meant to help executives understand the history of IPOs, and how that might impact their own IPO decisions for the future. Stay tuned for the follow-up to this piece, where Jennifer and YCP lay out some of the essentials for a successful IPO. That includes how companies can effectively communicate their value proposition to potential investors, what steps companies can take right now to overcome potential challenges, and how SPACs influence traditional IPOs, among other things.