February 16, 2023
After the post-pandemic, record-setting pace of 2021, the dealmaking landscape slowed significantly and 2022 proved to be a subdued year for initial public offerings (IPOs) and merger and acquisition (M&A) activity.
Geopolitical tensions, inflation and interest rate hikes weighed on the broader economy, making market conditions volatile for companies looking to go public. In 2022, there were 513 traditional IPOs or direct listings that had market capitalizations of at least $50 million, compared with 1,269 in 2021, according to Dealogic data.
While some blockbuster names such as Porsche — whose debut raised 9.4 billion euros ($9.89 billion) in September 2022 — still pursued a public listing, many companies chose to defer a public offering, instead opting to raise money in the private markets. Private market fundraising, which attracts the likes of private equity (PE) companies, venture capitalists (VCs) and sovereign wealth funds, is currently outpacing IPO market volumes. Here, the Private Capital Markets team at J.P. Morgan discusses the key trends driving activity and the outlook for 2023.
As the dealmaking landscape slows, companies may choose to stay private for longer.
Private capital can help companies remain flexible. They may find it easier to adapt and grow early on.
2023 will be active on the private placement side and there is a sizeable pool of capital.
Investors are sitting on around 1.96 trillion dollars of "dry powder." That's money raised by private investors, but not yet deployed.
Areas gaining investor interest include technology, energy transition, and renewables.
“When I take a look at last year, the volumes stayed fairly robust. In the U.S., over $250 billion was raised and over 1,500 deals were completed, each of which was north of $50 million, so a lot of capital was deployed in 2022,” said Keith Canton, Global Head of Private Capital Markets at J.P. Morgan.
Looking to 2023, investors are still grappling with real uncertainty. Heightened market volatility compressed public market valuations and the likelihood of a U.S. recession has created an environment where investors are looking for downside protection in private market deals — more so than in previous years.
“We’re seeing investors increasingly look for cushion in their deals, and that cushion is coming in the form of lower valuations or structure,” said Canton.
As well as needing more downside protection, the makeup of the private market investor base has also undergone a shift. Historically, private markets were funded by VCs and PE growth funds. A lot of interest and capital from public market investors, mutual funds and large, tech-focused hedge fund communities followed, but that demand has fallen off significantly as a result of the market sell-off in 2022, particularly in tech.
“Companies that looked expensive a year ago now may look reasonably attractive on a historical basis, so a public market portfolio manager may want to deploy there. While public valuations have come down, private valuations haven’t come down quite as fast on the marks,” said Canton.
However, crossover investor participation has declined meaningfully from historic levels as public market conditions have become more challenging.
“The capital from public market investors has been replaced with greater interest from private equity, sovereign wealth funds and family offices, who have all stepped up to fill the gap. It’s why we still had $250 billion of private equity raised last year, even though we lost the public-style investor,” said Canton.
Overall, interest in earlier-stage companies tends to be dominated by VCs and growth equity funds. As companies mature and move closer to an IPO, sovereign wealth funds and crossovers come into the picture.
“Businesses are increasingly looking at raising hybrid capital that sits anywhere between equity and debt, so you have new players such as convertible funds, hedge funds and credit funds also looking at the product now,” said Nicolas Skaff, Head of EMEA Private Capital Markets at J.P. Morgan.
Regionally, Europe is still much smaller than the U.S., but the market is gaining traction. The European market is currently 30–40% of U.S. volumes, with around $90 billion raised in EMEA last year. This is down from the record post-pandemic boom of 2021, but close to double the volumes and transaction numbers seen in 2020.
The emerging themes of lower valuations, further downside protection and a more diversified investor base are expected to continue at least into the first half of 2023, as companies that postponed IPOs in 2022 assess the market outlook for the year.
For companies exploring the pathway to a potential IPO, the problem isn’t as simple as overcoming a bear market and volatility. They also have to acknowledge that the valuations they achieved from private investors in the last couple of years haven’t quite caught up with the change in public market sentiment yet.
“We have a very active and deep pipeline of companies that are ready to do IPOs. Many of those companies thought they were going to IPO in 2022 and that didn’t happen. We now find ourselves in the first and second quarter of 2023 where there are not a lot of IPOs taking place, and these companies are going to need funding,” said Canton.
Global private capital dry powder stood at around $1.96 trillion in December 2022.
Startups in this position may have to compromise given current market conditions — either by slowing growth because capital is not currently available in the IPO market, or by finding a valuation level they are comfortable with that also matches investor demand.
“Issuers who were perhaps eyeing the IPO market are now looking to take some capital to make sure they have sufficient runway and buffer to continue their growth plans. I think 2023 will be active on the private placement side because of this dynamic,” said Canton. “If the IPO market remains challenged for an extended period, a number of companies planning to IPO will end up needing to raise another round of private capital. We’re seeing that now and I think that is going to be a theme for the first half of 2023.”
On the private side, there is also a sizeable pool of capital. Investment data company Preqin estimates investors are currently sitting on around $1.96 trillion of “dry powder” — money that has been raised by private investors and that has yet to be deployed — as of December 15, 2022.
Remaining private for longer can also give companies greater flexibility. They may find it easier to adapt and grow their business in the early stages with private capital, before choosing a public route.
“Ten years ago, a company that may have gotten two rounds of financing and was then thinking about going public, now can get four or five rounds of financing from different investors and therefore stay private for a longer period of time,” said Skaff. “With private companies, we find that pool of capital to be very global. You could be an investor in Asia or the U.S. — that capital-raising can happen anywhere.”
If the IPO market remains challenged for an extended period of time, a number of companies planning to IPO will end up needing to raise another round of private capital. We’re seeing that now and I think that is going to be the theme for the first half of 2023.
Technology companies have been key to the growth of private markets in the last 10 years, but is this set to continue in 2023? Tech stocks are in the spotlight after their decade-long bull run was sharply reversed last year — meaning up-and-coming tech startups are facing a potentially longer transition to IPO.
“I do think we’re going to see more of the traditional tech names come to the private placement market this year — software, fintech and potentially some of the consumer internet names — primarily because they are last in the queue to go to the IPO market and they need capital,” said Canton. “If they want to show the growth and potential profitability they need to be successful IPO candidates, they are going to need capital and they are going to need to get that from the private capital market.”
Outside of tech, other sectors such as energy transition and renewables are gaining a lot of interest from investors. J.P. Morgan oversaw close to a dozen private energy transition and renewables transactions in 2022, and at least another dozen are in the pipeline for 2023.
“A big focus for us has been energy transition. We are seeing a lot of new funds from existing investors, particularly corporate VCs and specialist funds, that are specifically targeting the energy transition, renewables and climate space,” said Skaff. “People understand this is an issue that is not going away — it’s a problem that needs to be solved and it’s going to take a lot of capital to do so. For companies demonstrating a solution in their niche of this corner of the market, there is capital available.”
These companies are not immune to the issues other sectors are facing, with valuations still under pressure, and they are also not yet natural IPO names. As many of these startups are trying to tackle highly complex global problems, they tend to have very large capital needs, so the buyer universe and issuers have been more willing to converge on valuations.
A big focus for us has been energy transition. We are seeing a lot of new funds from existing investors that are specifically targeting the energy transition, renewables and climate space. People understand this is an issue that is not going away — it’s a problem that needs to be solved and it’s going to take a lot of capital to do so.
Returning to a more fundamental approach of assessing companies on their scalability, profitability and resilience has also been embraced. Even big-name startups without all three of these elements have become less appealing to investors in an uncertain market environment. “Every company has to get looked through the lens of these factors. Those companies checking all the boxes are likely to have successful capital raises, whether it’s public or private,” said Canton. “We are seeing much more focus on those fundamental questions rather than the fear of missing out or FOMO factor that you saw with a lot of the brand-name companies. People are less likely to say now, ‘I don’t want to miss the next big thing, let me just write a check.’”
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