Deciphering the mixed signals on IPOs

CFOs need to be preparing for the next IPO window, one expert said.
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4 min read

Several recent high-profile IPOs have given rise to expectations that the IPO window might be opening up a little bit. But lower valuations continue to dog companies looking to offer IPOs, signaling that perhaps the IPO market is still not quite back on its feet. So, how to navigate the mixed signals?

To help navigate the mixed signals CFO Brew spoke to Will Braeutigam, US capital markets transactions leader at Deloitte, about what the IPO market looks like, how valuations are playing out for IPO hopefuls, and what CFOs can do to prepare for an IPO.

This interview has been lightly edited for length and clarity.

In your view, what has the IPO window looked like in the last 12–18 months?

If you go back to November 2021, most people would say that was the last time the IPO window was open for traditional types of companies seeking capital in the public markets. And then into the beginning of 2022…you saw high volatility, increasing inflation, war in Europe, supply-chain constraints across the country, which led to large changes in the bid-ask spread. Valuations were coming down. Sellers were still wanting the same valuations [but] buyers were bringing their valuations way down for that volatility, especially in early-stage companies.

In the middle of 2022, you started to see large carve-out entities in the tech or other spaces occur, and into the fourth quarter of 2022 and the first quarter of 2023. As you continue to move forward and volatility decreases, the bid-ask spread decreases. You started to see what we referred to as the “emerging growth” companies go public in June 2023, outside of the normal spaces—not tech, or life sciences. As we emerge into September, we are now seeing some of those historical-type powerhouses within the IPO industry.

I think we’ll continue to look that way, even from the IPOs in June. Most of them are cash flow generating, very large valuation companies, “decahorns,” that are seeking capital in this environment. What created this thaw, other than companies continuing to test and be successful along the way, is the bid-ask spread blew out in January. Valuations have come slightly closer to the sellers that are looking to raise capital.

But the sellers also understand that we are in a different environment. The cost of capital has more than doubled for these types of entities. Valuations are going to decrease as these companies need additional capital before they can distribute cash flow to their investors.

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Where do you see valuations in that bid-ask gap right now?

I would say that the owners, the founders, the investors in these entities, have come to a realization that valuations have come down in the near-term and are going to be down for quite some time as the cost of capital is rising. And so they’re meeting somewhere in the middle. But I would say that valuations have not, and you would not expect them to, recovered to 2021 valuations, given the increase in cost of capital.

How do you see the IPO window moving forward?

We need some success from the tech and life sciences industries. Now, hopefully we’ll see tests of those markets here in September, maybe October. There are several entities that would love to try and test the markets in the next two months. If they’re successful, that would open up further thaws on the market and open up a smaller window into the fourth quarter that will hopefully increase its way into Q1 and Q2 of next year. I think before we would see a full market opening a window where early-stage entities can raise capital in the public markets before being able to show profitability and positive cash flows, we’re looking at Q1 or Q2 before investors will have an appetite to invest in those types of entities.

How, and when, should CFOs be thinking about the IPO window?

We don’t know how long the next IPO window will be, when it opens up, and [when] capital is available to emerging growth entities to foster their growth. We don’t know how long that will last. It might last three months, it might last six months, it's likely not going to last 18. If companies start to prepare to raise capital for the public markets once the windows open, they’ll likely be preparing for the next window. Because it’ll likely be too late with the time that it takes you to prepare for SEC filing, go to the SEC; you raise your capital, you’re on your road shows—it’s time intensive. So companies are constantly thinking about when is the right time because they also want to be good stewards of the capital they have on their current balance sheet.

News built for finance pros

CFO Brew helps finance pros navigate their roles with insights into risk management, compliance, and strategy through our newsletter, virtual events, and digital guides.