Investor expectations for high-quality, early-cycle IPOs is supporting demand for new listings

IPO expert panel moderated by Brian Sozzi, Executive Editor at Yahoo Finance, today at 12 PM ET

Today, Edelman Smithfield announced the findings of a new Investor Pulse report, “Investor Expectations for a U.S. IPO Market Recovery,” that uncovers institutional investor perceptions on the U.S. IPO market, including how they have evolved from the IPO boom in 2020 and 2021, and examines the factors that influence investment decisions.

“Following a record low number of issuers coming to market in 2022 and 2023, the U.S. IPO market may have finally reached an inflection point,” said Ted McHugh, Edelman Smithfield’s Head of Strategic Situations and Investor Relations. “While the macro environment remains somewhat uncertain, our data clearly shows that investors have a strong appetite for new issuers. This uptick in demand for new issuers is driven by investor expectations for high-quality, early-cycle investments at a reasonable valuation. As companies consider entering the public markets, they should be aware of emerging investor preferences, including the desire for lower leverage, more balanced financial profiles, and increased trading liquidity compared to prior cycles.”

Notable highlights from the special report include:

Investor appetite for new listings has increased compared to the 2020-2021 IPO boom

Nine in ten institutional investors say they are about the same or more likely to invest in future IPOs in comparison to the investments made during the IPO boom of 2020-2021. Over half of investors say they are more likely to invest. The anticipation of early-cycle, quality issuers is feeding a significant increase in investor demand for new investments.

U.S. market for new listings expected to pick up by the end of 2024, bolstered by potential Fed plans to cut rates

Eighty-nine percent of investors expect to see resumed activity in the U.S. IPO market from April to December 2024. Seventy-six percent of investors agree that the Fed must lower interest rates before they invest in an IPO. Most agree that the Fed must lower interest rates by 50-75 basis points, though more recent discourse suggests that the market is primed for deal flow even without an immediate rate decrease.

Investors demand high-quality issuers in early cycle activity, underpinned by the following parameters

Low Leverage

Investor interest for highly levered companies has dropped significantly since 2021. Fifty-nine percent of respondents are only willing to take on 1-2x Net Debt/LTM EBITDA, at most.

Balanced Financial Profiles

Most investors are valuing companies based on EV/EBITDA, with EV/FCF becoming increasingly important. In addition, while 58% of investors agree that current profitability is not required, 64% of investors say that quality of future earnings remains critical to evaluating future performance.

Limited Private Ownership

Despite aversion to high debt levels, 56% of investors rank paydown of equity sponsorship as most important when it comes to uses of IPO proceeds, clearly indicating a preference for issuers with higher stock float and therefore, more trading liquidity.

Strong Governance

Recent Board refreshment and Board diversity are viewed most favorably among corporate governance factors impacting a respondent’s willingness to invest. On the other hand, classified/dual structure Boards are viewed as having a negative impact on willingness to invest, with 64% of investors expecting these types of structures to be sunset in the first 5-10 years of being public.

New shareholder engagement is crucial within the first year of being public

Seventy-one percent of investors say a typical holding period for IPO investments is 12 months or less. Given the expected turnover of shareholder bases, new issuers should prioritize shareholder targeting and engagement within the first year of being public.

EDELMAN SMITHFIELD IPO EXPERT PANEL

The Edelman Smithfield team will host an expert panel today, April 23^rd, at 12:00pm E.T. Participants include industry and IPO veterans, namely moderator Brian Sozzi, Executive Editor at Yahoo Finance; and panelists Jane Dunlevie, Global Head of Internet Banking at Goldman Sachs; Barbara Miller, Vice President and Senior Portfolio Manager, Federated Hermes; and Kimberly Greenberger, former Managing Director at Morgan Stanley and current Senior Advisor at Edelman Smithfield. To register for the panel please visit the following link: https://lnkd.in/e6Gr6SWv

ABOUT THE EDELMAN SMITHFIELD INVESTOR PULSE REPORT

The Edelman Smithfield Investor Pulse Report: Investor Expectations for a U.S. IPO Market Recovery surveyed over 100 U.S. institutional investors from January 24 to January 30, 2024. Institutional Investors are defined as those who are employed full-time as chief investment officers, portfolio managers and buy-side analysts, who are directly responsible for or directly contributing to decisions regarding an institution’s investable assets. Of the participating investors, at least 50% work for investment firms with assets under management of $50bn or more.

ABOUT EDELMAN SMITHFIELD

Edelman Smithfield is a financial communications boutique that specializes in financial markets and strategic situations with the full reach and resources of Edelman. The Edelman Smithfield team comprises approximately 250 advisors across more than 25 cities and 15 countries serving an expansive roster of top organizations around the world. www.EdelmanSmithfield.com.

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