Baird ECM Outlook – Stars Aligning for a 2024 Rebound

Baird’s ECM Outlook: 2024 Rebound

With 2023 (and 2022) behind us, 2024 is expected to deliver a more conducive environment for equity offering activity. Many of the headwinds the market has had to combat over the past 24 months have either reversed or are showing early signs of becoming neutral to positive tailwinds. 

Happily turning the page on 2023

It’s hard to believe that in 2023 the S&P 500 and NASDAQ finished near all-time highs up over 24% and 43%, respectively, while volatility, as measured by the VIX, sat below 20 for most of the year and closed 2023 near three-year lows. The IPO market certainly agrees. Between a swift rise in rates, a banking crisis and heightened geopolitical tensions, the macro backdrop for new issues was largely a headwind throughout 2023. While several windows appeared to open over the course of the year, they were often short-lived and dominated by select industries and a specific company profile. Key company characteristics that manifested themselves in 2022 (e.g., scale, positive cash flow, profitability, earnings growth) accelerated further in 2023.

• As a result, IPO volume decreased 24% YoY to 53 pricings, the lowest output since 2008. However, total capital raised was up 146% YoY to $22B, as the median IPO deal size increased to $190M from less than $50M in 2022.
• For those who completed an IPO in 2023, many did so with cornerstone investors publicly committing to one-third of the offering, on average
• Alternatively, the follow-on market experienced a recovery in 2023, albeit off of a low base, as volume and capital raised increased 34% and 47% YoY, respectively
• Importantly, liquidity events for existing shareholders increased significantly in 2023, as 37% of all follow-ons included a secondary share component, compared to just 21% in 2022

Constructive market conditions as we enter 2024

With nearly all of last year’s market return attributed to expansion of valuation multiples, the buyside’s attention is focused on a return to earnings growth (consensus S&P 500 EPS growth of ~10%) and the near-term trajectory of rate cuts by the Fed. As more market signals have turned green, it comes as no surprise that there has been a recent uptick in IPO filings, positive IPO headlines and confidential processes reigniting workstreams. After two consecutive years of muted IPO activity, consistent with the droughts of the dot-com bubble and GFC, market participants are expecting volume to return to a more normalized level of ~150 (2015-2019 average). The growing public IPO backlog and number of rumored high-quality assets contemplating a 2024 IPO are positive early indicators of a sustainable recovery.

U.S. presidential election – buckle up for a wild ride but minimal impact to ECM activity

Despite what is shaping up to be a volatile U.S. election season, the equity market and capital formation tend to weather the storm with little to no impact. In the last five presidential election years, equities have finished the year in positive territory with a median return of ~10% (with the only down year being 2008, for obvious reasons). This is positive news for IPO candidates. In fact, since 2000, median IPO volume in election years relative to non-election years is nearly identical (164 vs. 153). Issuers tend to avoid a two-week window preceding the election to avoid political uncertainty and market volatility.

As recent history has shown us, the equity markets are forward-looking and when the stars align, equity offering activity is capable of bouncing back in a meaningful way. We recommend that issuers and stakeholders prepare now to take advantage of a potential substantial improvement in market conditions. Please contact Baird’s Equity Capital Markets desk to discuss the market landscape and your capital raising plans for the upcoming year.