Exit comeback: After big slowdown in IPO and M&A activity, analysts optimistic for a rebound
After startup exit activity took a nose dive in 2022 amid inflation, rising interest rates, and other macroeconomic forces, some tech analysts are predicting public listing and acquisitions to pick up in the latter half of this year.
Speaking at a Silicon Valley Bank event in Seattle on Wednesday, SVB Private Chief Investment Officer Shannon Saccocia said investors will have a “risk appetite increase” in the third and fourth quarters because of the positive returns the public equity markets have produced historically.
“Everyone is really excited right now to park their money in 4.5% yielding T-Bills (Treasury Bills),” she said. “Over time, some of that money will be funneled back into risk assets.”
This could improve investor sentiment toward equities and growth stocks in the public and private markets, she said.
Total exit deal value was $71.4 billion in 2022, down more than 90% from the year prior, according to PitchBook’s Q4 Venture-Monitor report. It’s the first time since 2016 that annual exit value failed to eclipse $100 billion, the report noted.
There were 71 IPOs in the U.S. that raised just $7.7 billion last year, the lowest in more than three decades, according to data from Renaissance Capital.
And the proceeds from Nasdaq and NYSE IPOs — the amount a company fundraises from selling their shares to the public markets — dropped 94% in 2022, from $155.8 billion to $8.6 billion, according to EY’s IPO report published in mid-December.
Not a single company from Washington state went public via IPO in 2022. Just two companies — cannabis platform Leafly and photo giant Getty Images — went public via a special-purpose acquisition company (SPAC).
That stands in contrast to 2021, when there were seven IPOs in Washington state, in addition to three SPAC deals, according to GeekWire’s M&A and IPO index.
Lackluster conditions for companies looking to go public will likely persist for the first half of 2023, said Ibi Krukrubo, a partner at Ernst & Young. While it is difficult to forecast geopolitical tensions, he does foresee inflation moderating, resulting in interest rates easing.
This could push some companies that are already positioned to IPO to take advantage of a window when there is positive investor sentiment, he said.
A number of high-profile companies like Stripe, DataBricks and Instacart are considering public offerings this year.
Krukrubo added that the IPO market tends to fare better in economic conditions where there is less volatility. If the Feds do decide to ease rates, markets could return to a state of stability, providing a moment for increased IPO activity, he said.
In a follow up interview at the SVB event on Wednesday, Saccocia said she expects M&A activity will pick up before IPO volumes improve.
She said one of the biggest challenges facing exit volume right now is the lag between private company valuations catching up to their public market peers.
Public market stocks often serve as a barometer for private companies, and when they decline, startups take the brunt of lower valuations from investors and potential acquirers.
Private companies are already being acquired at lower prices. The median post-money valuation for buyouts of VC-backed companies fell from $280.0 million in 2021 to $120.0 million in 2022, according to PitchBook. During this period, nearly 50% of exit value was a result of an acquisition.
Carta, a software company that helps companies organize their cap tables, found that the percentage of companies with reduced valuations in Q3 nearly tripled from 8% to 22%.
Saccocia expects these valuation resets to continue to ripple through the private markets, increasing the chance of companies and private equity firms scooping up startups at more favorable price tags.
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