David Rawlings: Hi. I'm David Rawlings. I'm the country head for the J.P. Morgan business in Canada and one of the hosts for the What's the Deal? podcast. I am joined today by Lorenzo. Lorenzo is responsible for the Global Syndicate Team within our Equity Capital Markets group, has been with the firm for over 20 years. Over the course of this podcast, we're going to spend some time on equity markets broadly, the current state of the IPO market, and how things could evolve over the course of the next 12 to 18 months. Lorenzo, thanks so much for being here.
Lorenzo Soler: Hi, David, and thank you very much for having me.
David Rawlings: So Lorenzo, let's just spend a minute on you, and your history at J.P. Morgan.
Lorenzo Soler: My first job out of college was at Cazenove in London, which as you know was the last boutique British investment bank at the time. They had an incredible graduate rotation program, which meant that I was able to spend a few weeks in each of the departments within the banks. I spent time in sales. I spent time in trading, in ECM, in asset management, and at the end of that stint, I felt like the best fit for me was ECM. I really enjoyed advising corporates the excitement of doing deals, but at the same time, I also liked the market aspect and the investor dialogue aspect of the business. Four years into my career at Cazenove, J.P. Morgan bought us through a joint venture, and here I am 22 years later, sitting in New York, talking to you. I spent 19 years in our London office, always working in equity capital markets, origination, and syndicate roles and in 2020, I moved to New York to run the Americas team and in the last couple of months, I've been given a global remit, so I am also responsible for our teams in Asia and Europe.
David Rawlings: So Lorenzo, you said, 2020 is when you moved from the U.K. to the U.S. It feels like there've been two or three cycles that have happened since 2020. So it's been an interesting time for you to be leading this business for us. Let's spend a minute on the current state of the IPO market, and maybe you’ll give some comments on what we've seen over the last several months and what we're seeing today.
Lorenzo Soler: So in terms of the current state I think the punchline is there are some green shoots. I am very excited about the next 12 to 24 months. I am very optimistic about the calendar coming back. But I think you do need to take a step back, and look at the numbers to realize that we're still far off normal levels of activity. Pre-2021, where we had the record high year, the 15 years prior to that on average in the Americas, you saw about 115 IPOs per year, raising about 40 billion dollars per year. And these are IPOs about 50 million in size. Last year, there were 19 IPOs. And this year, we're at 24. So yes, the trajectory this year is encouraging. Yes, there are green shoots. But we're still running way below normalized levels. So I think it's hard to draw too many conclusions from what we've seen this year as we think about IPOs coming back in 2024, which was always our base case, and 2025. What I would say from the class of IPO that I've worked on this year and the ones we've seen this year is we do remain super encouraged by the quality of engagement from the buy side, the quality of cornerstone investors. You know, those same investors continue to want to look at new ideas, and we're engaging with them as we speak on potential deals for next year. So investor engagement, very high, but tough to draw too many conclusions based on the limited data set.
David Rawlings: What are you currently seeing from a performance perspective?
Lorenzo Soler: I would say, you know, similar thing. A lot of recent press talks about the challenges in the last few weeks. There have been some IPOs that are in the year that have done extremely well, that have traded extremely well. But it's fair to say that the batch that we saw in the last three or four weeks has been more mixed. And I don't think you can separate what's happening in the world, what's happened to S&P and NASDAQ in that period, you know, down about six or seven percent, what's happening to rates with the 10-year going through five percent. The challenging geopolitical environment. So, again, looking at these IPOs and looking at day one, week one, month one performance in the last couple weeks isn't the right way to be thinking about them either. we should really be, looking at the macro and thinking about IPOs, on a longer term basis. How are they doing two, three, four quarters out, not in the first couple weeks?
David Rawlings: Well, I take your point on two things. One, the narrowness within the equity markets this year and the leadership concentration within really a few names, if you will, versus the broader market. But I think secondly you talk about quality. So, in a less vibrant market, only the highest quality names can get done. So can you just talk about some of the issues that you've seen in 2023 and really the quality around those issues?
Lorenzo Soler: Well, if you mean it in terms of what our investor's looking for, what types of quality businesses are they prepared to buy, I would say, massive focus now on structural growth stories with profitability. The days of, 30, 40 percent top line with less of a focus on bottom line are behind us. I think everyone now is much more interested in a disciple management team that's growing high single digit, low double digit, with strong margins. I think that has become critical in the IPOs we've seen this year, and that is most of the class we've seen this year have had those characteristics. I think conservative guidance is very important and something investors will be focused on as we think about the next wave of IPOs. I think capital structure, stating the obvious, but with the rate environment that we're currently going through, people are going to want to see balance sheets that aren't too stretched and companies that are able to deliver high free cashflow yields. And I also think from a technical perspective, and we've talked to a lot of investors over the last few months around this, I think, appropriate lockups, particularly with companies that have deep capital bases and have had lots of private rounds, I think, making sure we have structures in place whereby, existing owners sell over a longer period of time in a coordinated way, in a staggered way. I think those will become factors that the buy side will look for as we think about the next wave of IPOs to come.
David Rawlings: Terrific. So what I'm hearing from you is it sort of leads you to generally larger, more established companies, to your point, clean balance sheets and a more sustainable earnings and growth track. How has the cornerstone investor evolved over time, and how important is that in today's environment? And then secondly, just a little bit more detail on lockups and what might be expected.
Lorenzo Soler: So listen, I think the cornerstone investor has evolved in the last 12 to 18 months and has become more prevalent and I believe will become more prevalent as IPOs come back in 2024 and '25. The challenge is to really try and spend time early on and be thoughtful about introducing these companies that were mandated to meet with these types of investors nine months, 12 months in advance of the IPO and really give them the opportunity to get to know these companies, to build their models, to gain the trust of the management teams, and to identify the right long-term shareholders for these businesses. We will be spending and we continue to spend a lot of our energy on IPOs and introducing companies to clients at an earlier phase, and setting up not one round of meetings, but three or four in that lead up to the IPO, and giving them more access to the business doing site visits. and that has become a very important part of the IPO process, because we want to make sure we are seating these companies with the right long-term investor. So I do believe we will see a lot more of that. I think it's the right thing to do. and I think the buy side are also very keen to engage at an earlier phase. so that will continue to be the mold of how we execute IPOs over the next 12 to 18 months.
David Rawlings: And just one more question on that. Is there sort of a perfect place in terms of size of deal? Do we think the cornerstone should be 20%, 30%, 40%? Is there sort of a going in position in terms of what would be ideal for the outcome of an IPO?
Lorenzo Soler: Yeah. And actually, (laughs) that's a good question, David, I'll answer that in two ways. When we think about size of deal, I do think as a base case, size of deal going forward will be bigger than size of deal we saw in 2021 and 2020. So I think as a percentage of float at IPO, we're going to see bigger IPOs as a percentage of float, to make sure we have adequate liquidity. To make sure we have the right clients being able to buy appropriate positions and build on those positions. So I do think you will find bigger percentage of floats at IPO in the next phase. That'll also help with the overhang and perception of overhang. And then within that float.
Lorenzo Soler: As a rule of thumb, 20–30% feels like the appropriate mix to ensure there's still enough available for new investors but also to seed the right cornerstones with enough of the company so they have what they need on their side. So I would put it in that 20–30% bracket. But there will be exceptions on either side of that number.
David Rawlings: Terrific. So, that helps us understand the cornerstone piece. And let's just talk about the lockups, maybe what's changed there and what investors are expecting at this time.
Lorenzo Soler: Again, not enough of a sample set this year, but in the previous wave of IPOs, there was less focus on lockups because there was just a lot of euphoria around the whole product, so perhaps less scrutiny on what type of supply we might see right after the IPO. And there were examples of IPOs in the last phase where a week after the IPO, there were people that were able to sell again. So I think going forward, the feedback we're getting from our investor clients is they want to make sure that if they're gonna buy in the IPO, that there is not gonna be immediate supply two weeks, a month later. So I think making sure we have orderly lockups. We could also have price triggers. So there could be a mechanism whereby if the stock gets to a certain price, that would also enable existing shareholders to sell, but I do think that's gonna become a lot more of a focus in the market. People do not want to buy an IPO if they think there is gonna be a wave of supply coming in the short term.
David Rawlings: Well, it certainly makes sense, especially in a more challenged market. So you talked about earlier that you're optimistic about 2024. I mean, I'd sort of make a joke that we're as bankers often we're optimistic about six months forward because the alternative is to be pessimistic. It's a lot more fun to be optimistic. But let's look at 2024, and talk about what could happen. What are you thinking about as you think about the first half of 2024?
Lorenzo Soler: So in terms of the actual pipeline as we think about where we are today and we think about how that compares with previous years, from a pure probability-adjusted pipeline, we're currently slightly ahead of where we were going into 2019. So I think we feel good that we have, you know, a long list of mandates, two thirds of those tech and healthcare, but also across every sector, so consumer, financials, industrials, energy transition, renewables, et cetera. So we feel good about the depth and the quality of our pipeline, and it comes out of private equity, it comes out of founder-led businesses, it comes out of carve out IPOs. From the demand side of the equation, I still think, and I will always think that we rarely have an issue. We rarely have an issue. Identifying investors, for well-priced and interesting IPOs. So I do feel from a demand/supply dynamic, we're in a good spot as we think about next year. The million-dollar question that's been on our minds for a while now is has the bid ask spread narrowed enough, and I do think we're in a place now where public evaluations have been such that corporates and sponsors understand the levels required if they want IPO businesses, private evaluations are also coming down. From a bid/ask perspective, we're in a good place. In my mind, the macro is key. Stability, rates having peaked for me, that'll be a catalyst to our product. There's still evidence that we're not quite there yet, and will that be in end of this year, will that be Q1, will that be Q2? I can't give you an answer on it. My view is that it will be in the early part of next year, but I think that'll be a key catalyst to get our product going.
David Rawlings: And how do you think the election cycle may impact this?
Lorenzo Soler: If we look back over the last three elections, so 2012, 2016 and 2020, it's actually had the minimum impact on ECM volumes in those years. And in fact, IPO volumes in terms of number and IPOs per year in those three years have averaged about 125 IPOs per year. So higher than the last 15-year average. There will be shorter windows we'll need to get ready and hit those windows but based on the last three election cycles, we should expect normal levels of ECM activity.
David Rawlings: You've alluded to some of this already, but how would you define a successful IPO when things come back both from a corporate's point of view?
Lorenzo Soler: Again, hard one to answer, David, because ultimately it'll come down to the corporate or the sponsor. They'll have their own definition of what they think is a successful IPO. But I've been doing this for a long time, and, in my mind, it needs to be a combination of shareholder register, of fair evaluation, and of aftermarket. And of those three, I would probably put the most emphasis on the first. But I think those three components are very important and when I talk about aftermarket, I don't mean day one, week one, month one. I mean two, three quarters out, have the top shareholders that we've brought into the IPO, have they built on their positions? You know, is the stock trading in an orderly fashion? Is the stock outperforming peers? So for me, that is how we should be thinking about IPOs and successful IPOs. We should not be focused on day one moves. And in fact, I would argue that a day one 40, 50% pop is not healthy for anyone. It leads to higher volatility, it leads to higher volume, and it's usually influenced by factors that are external to the IPO.
David Rawlings: So Lorenzo, you spent almost 20 years in the U.K., you've spent the last three years in the U.S. You now have this global remit. How has that evolved for you, and how is that an advantage in terms of the way we can now interact with clients versus those peers who are set up more regionally?
Lorenzo Soler: So in terms of our setup, the first point to make is we do have a very deep and experienced team globally and in all three regions that I rely heavily on. We've been doing this for a long time. Our clients are increasingly also being set up on a global basis, so I think being able to interface with our clients and meet their needs in terms of asset allocation and how they're viewing the ECM calendar on a global basis is critical. And thirdly, I would say, at the end of the day, it enables us to share information in a differentiated way from our peers, which benefits our clients on a global basis.
David Rawlings: Amazing. Well, it's obviously a big world out there. We have incredible access. What a great role for you to take on at this time to really help develop this business further. In closing, If you're a company and you're thinking about going public over the course of the next year, just to bring it home, what advice would you give those companies?
Lorenzo Soler: I would say get ready. Get ready early. Get ready now. Start to engage. Start to meet with investors. No one has a crystal ball, so it's impossible to know whether it's Q1, Q2, Q3. I think what we can all tell you, and we've all lived through multiple cycles over the last 22 years or so, is that when the window comes back, it can move fast, and there will be first mover advantages. So if you are thinking about listing, you should use this time to get ready.
David Rawlings: Awesome. Listen, it's been great to spend time with you. And Lorenzo, let's hope your outlook for 2024 holds true, and thanks for all the hard work you do on behalf of J. P. Morgan and our key clients.
Lorenzo Soler: Thank you very much, David.
David Rawlings: And thank you to our listeners for tuning in. We hope you join us again next time.
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