Will IPOs ever come back?

0:06Pushkin. Okay, listen up, because those shiny bankers with their fancy suits and their good hair really mean it this time. next year is going to be a biggie for new companies hitting stock markets. Stocks are looking rosy, a whole bunch of companies and their private equity backers have been itching for their moment to launch, and those bankers are raring to go and get the deals out there. So today on the show, we're asking, firstly, really? I've heard this before, and it just never happens. We're also asking, whodunit? Why have we had a slow patch in this stuff recently? And we're asking, aside from the bankers who get lovely bonuses from all this, who cares?

0:51This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist and still a baker of delicious mince pies at the FT in London. And I'm joined today by a recovering banker and friend of the FT, Craig Coburn. Craig, welcome to the show. Thank you, Katie. I've got a little present for you. Oh, no. What is the present? I've got you a mince pie. Oh, thank you. I've heard so much about these mince pies from all over the city. People have been talking about them. You can choose to eat it now or you can choose to eat it later. I'll nibble during the podcast.

1:27Okay, okay. Feel free to provide feedback. Now, I was reliably informed you were going to wear your Fulham Football Club Christmas jumper today. I've let down the side. I admit it. You've failed because I've got my Liverpool Football Club Christmas jumper on. And the tagline is, you'll never walk alone, which we can all agree is pretty great. It's a good tagline. I've let down the side by not wearing my Fulham Football Club Christmas sweater. But I hope to be at the game this Sunday when we play against Southampton. So listen, tell the class, right? You did this stuff for years, right? Doing these deals.

2:05It's pretty full on. What is involved in kind of getting these companies to market and how much does it take out of you as a human to get these deals over the line? To get a company market takes a minimum of nine months and maybe longer. The company does most of the work. They have to prepare themselves internally, their accounting systems, their finance systems. So much about the company has to change to be listed on a public market. For the bankers, we come in a bit later, but what we have to do is work with the lawyers to prepare the prospectus. We have to work with the company to prepare marketing materials.

2:43And then we have to go out to try to encourage investors or convince investors to invest in the company. It's often a new company, new industries in some cases, new story. Most of the time, investors aren't familiar with them, so it does require a fair amount of work. I would say beginning to end for a banker is six to nine months. Yeah, it's no joke. And this process of, so it's called an initial public offering, right? This IPO process where you get a company onto the stock market. It's like, there's a lot of glitz and glamour around it as well, right? It's a kind of, it's a real focus for investors, for stock market investors globally.

3:20It is showtime in investment banking. I know that sounds like a contradiction term, but it is probably the sexiest area of investment banking. You get listed on the stock exchange. You ring the opening bell. You have a big party. There's a lot of fanfare around it. The press write about it. I would actually say that it carries a disproportionate weight in the public imagination than probably its economic importance warrants. Yeah. Yeah. No, it's a good point. But 2024, we've had a bit of a dearth of this kind of glitz and glamour, right? It's been pretty slow on the IPO front, on companies hitting the stock market.

4:04So I got in touch with the lovely Nisha at DeerLogic for some stats on this. And globally, we've had the fewest IPO deals since 2016. So everywhere we've had 1 ,245 IPOs. That's not a lot. Now, the US hasn't done too badly here. about 200 or so. Europe, not so good. About 100 deals. It's the worst in more than a decade. And albeit it's not a terrible deal value. UK, yish, tumbleweed, 13 deals. That's the slowest year by far for a really long time. Back in the day, not even that long ago, you get somewhere between 65 and 100 IPOs from the UK a year. So what's going on, right? Because markets in and of themselves have been doing pretty well.

4:55Just the flow of new blood to the markets has really dried up. It is a real surprise because you've had two consecutive years now of 20-plus percent returns on the S &P 500 and fairly good returns elsewhere. And yet you have an IPO market that ranges from sluggish in the US to virtually non-existent in the rest of the world. I think when you look at the amounts of dollars that have been raised in IPOs, the numbers are pretty disappointing. I think there are probably three reasons for it. First is that we've just seen so many companies now wanting to stay private for longer. It is more attractive to stay private, not list, than to go public.

5:40That's a huge change from what was the case 10, 20, or 30 years ago. Yeah. And that can mean either that a company just keeps on doing what it's doing and it's owned by its founders, or it gets snaffled up by those dreaded private equity firms, right? So they're not really dreaded. I'll get emails otherwise. But these are like big investment firms that buy companies up before they're listed on stock markets. And the idea is that they make them kind of ready for showtime, right? Ready for prime time. They kind of build these companies up and make them into more successful beasts before they hit the public markets.

6:13The problem then is that in the good old days, investors in public markets used to be able to get in on the ground floor of these companies before they were really successful. Now the private equities cling onto them for longer until they're really successful and arguably like suck away those early returns from the public market? Yeah, I think that's right. Companies are staying private for longer. And as a result, the early shareholders are reaping the rewards. I mean, if you think about when Amazon went public in the late 1990s, it was, I think, a 35 or$36 million IPO. It was a small company.

6:51If you got into the ground floor there, you will have made a fortune. You contrast that with some of the big private companies that have no plans right now for IPOs. You think of SpaceX or OpenAI or Databricks. I mean, these companies are large. They are incredibly valuable, and they don't even have any plans to go IPO anytime soon. So that just shows you the extremes that we've seen over the last 25 years. These are big trends. These are megatrends. The growth of private markets is a megatrend that has been in the process for several decades. It was particularly accelerated after the financial crisis.

7:32And what you find now for a lot of companies is that they see that they get better value by selling themselves privately than by going public on the stock exchange. Without all that faff. Without the faff, without the public scrutiny, without the journalists meddling into their business, without the political activists, without the shareholder activists. You know, I'm not saying it's an easy life, but at least whatever problems you have, they can be dealt with outside the public layer when you're a private company. Okay, you have a different set of problems potentially, but you at least, you know, they are a different set of problems.

8:08And what I hear from a lot of bankers when they're talking to companies about whether or not to go public, what the best time is, a lot of them actually say to their clients, you're not ready. Don't do this. The scrutiny is something that you are not going to be accustomed to. It's a really kind of invasive, almost like a medical procedure. You have to really want to do this. If you want to be on a stock exchange, you have to really want to be on a stock exchange. That's correct. I think one of the issues we have as well is that some of the best companies are staying private. And some of the weaker companies in private hands are going public because they don't actually have a private bid.

8:51And so you have a little bit of a case of adverse selection. So as a result, you get into kind of a vicious spiral where the weaker companies go public. They don't perform very well. That sours investor sentiment towards other IPOs. And that makes the valuations that you can achieve at IPO when you list in a stock exchange lower. And it sort of creates a kind of a negative feedback loop. Yeah. Whereas in many of the best companies, they stay private, private for longer. And in many cases, the top companies, they can actually get liquidity to their employees and to their shareholders just via private means.

9:32I mean, even yesterday, there was a story that Databricks was going to do a massive capital raise. And part of that was to enable employees to cash out of their options. Yeah. Yeah. So if you want to get money to your employees to reward them, there are ways of doing that that don't necessarily involve being in the public market. For the biggest and best companies, yes. Yeah. So why are good companies staying in private hands for longer? Because one of the things I hear, like if you talk to bankers like you were in your previous existence, I can see you're nibbling on your mince pie there. How is it?

10:06It's delicious. Highly recommend it. But one of the things that bankers say is that there's a lot of companies that have been on private equity books for like too long now and they want to get out. So what has been stopping them from getting out so far this year? Is it just about, you know, again, one of the things that I hear is that private equity companies will be like, here, I'm going to list my portfolio company. I think it's worth$11 billion. And the market says, I don't think so. I don't think you're going to get that kind of valuation. So there's been this standoff while public equity firms kind of accept the reality that other investors are not prepared to back things to the extent that they thought they were.

10:49I think that's a really important point. You now have a backlog of over$3 trillion of assets in private hands. And one of the reasons that the private shareholders aren't bringing the companies to the stock exchange is because the value that they'd get is too low. Many of these private investors with private equity, venture capital, they have certain return thresholds. They've got to make a certain amount of money. and they may have bought the asset at too high of a price. And they don't want to, the term is mark to market. They don't want people to know what it's really worth. They want to sort of keep it in private hands where they can assign a valuation that suits them.

11:34So a lot of these private equity and venture capital firms, they're putting off the day of reckoning as long as they can. And they hope either that markets will continue to recover and that they'll be able to float it at an attractive price, or they find some other solution in the interim. But there really is this kind of standoff between private equity and public shareholders because there is this valuation discrepancy. Yeah, yeah. So, okay, that's the private equity bit of it. Another kind of culprit here in the whodunit is regulators. To what extent do you think regulation is playing a role here?

12:11I would say, Katie, it's broader than that. I would say government policy has damaged public markets. Certainly the regulators have as well. And you're referring, of course, to what's happened for broker research. And there are several developments that undermine the broker research model. And, you know, you could understand the logic of the regulators at the time, but the cumulative effect has been to damage that ecosystem. So, you know, 20-something years ago, you had Elliot Spitzer, who at the time was New York Attorney General, and he was the sheriff of Wall Street before he became known as client number nine.

12:50Google it, kids. It was a fun time. Yes, that is not safe for work, kids. But, you know, he basically forced broker research to be independent of investment banking. So you no longer had deals, IPOs, subsidizing broker research. And here in the UK, the UK championed an idea across Europe when it was part of the EU called Mythid 2. And it's a long story what this regulation did, but it basically forced – it made it difficult for investors to reward research through trading commissions, which was the way it had always been done. And it kind of killed off small mid-cap research. It was one of the most damaged, in my opinion, one of the most damaging pieces of regulation.

13:37And we're now unpicking it, right? The EU and the UK have now basically reversed course, but the damage has kind of been done already. So I would say those are issues that have damaged, but it's not just those. If you think of, for example, of what's happened with pensions, and I'm referring to the UK here because a lot of the pension reforms, again which were designed to make pensions safer forced pension funds to get out of stocks get out of shares and invest instead in bonds especially in gilts and what that does it took a lot of money out of the stock market and put it into fixed income yep so there's a whole lot of money sitting in uk government bonds so can you give us a cheerful picture here is there reason to be hopeful for 2025, do you think?

14:27Look, I think we have to make a distinction between the US and the rest of the world. As usual. The mighty US. The mighty US. The volumes have started to normalize. They're not as high as they quote unquote should be given just how strong the market is, but the market is open and people do have the option of floating in the US if they have a good story. There is a lot of money there and the US is attracting a tremendous amount of liquidity. So I think in 2024, the volumes would be around 30 billion US dollars. Probably in 2025, it would be in the region of 50 billion US dollars absent some kind of major crash or some kind of major hiccup in the markets.

15:08I think in Europe and Asia, it's much more challenging. And by the way, this is not a problem that's unique to the UK. No, no. Singapore had like one small IPO this year. You look at Brazil, the market's dead there. You look even in France, Spain, Germany, they'll have one or two IPOs at most of any significant size. The UK basically had one sizable IPO. I know they had 13 on the year, but there's only one of any real size. All of these markets are really struggling. I think part of it is that the countries aren't producing companies with the scale that attracts global investors. I think part of it as well is that a lot of their own domestic fund management businesses have kind of been hollowed out.

15:53I mean, we used to do deals 20 years ago. We would get a lot of demand from, you know, let's say a Milan IPO. We'd get demand from Italian institutions. We would get demand in a Paris IPO from French institutions. But now they have a lot less money to put into deals. So it's not unique to the UK. The only reason it's more conspicuous in the UK is because the UK has such a substantial and important financial industry. Yeah, yeah. But given that there are so many private equity holdings that are sort of, you know, circling the airport waiting for their landing slot, do you think there is a – I mean, next year's got to be better.

16:28Next year is definitely going to be better off a low base. Yeah. But you're right. The pressure is, the question is, will private equity have to swallow lower valuations to get their companies out the door? Or will they find some other way to push out what I call the day of reckoning? And as you know, private equity views a lot of very clever methods to delay things. So they're called continuation funds, NAV loans. They do a dividend recap. If interest rates come down, they can lever up the company, put more debt into the company and take out a dividend. Private equity are very enterprising people, and they have ways of delaying things if at all possible.

17:14So my final question is, who cares? Right. So bankers care about this stuff because their livelihoods depend on it. And if you're going to pay your school fees and if you're going to pay for your lifestyle, then you really need to get lovely bonuses that come from getting lots of these deals done. But for the broader public, why should anyone care that we've had a real slow patch in stock market listings? I think the public should care that private markets are now starting to replace public markets. Yeah. There is a public good to having a robust public market. You have more transparency around companies.

17:51You have more accountability around companies. If you care about things like corporate social responsibility or ESG, a publicly traded company is going to be much more responsive to these issues than if it stays in private hands. In addition, I think when companies go into private hands, especially when it's sort of a buyout firm, they tend to get loaded up with a lot of debt because the tax system tends to favor debt over equity. And that means as a result that you have companies that are on a weaker financial footing, which are able to generate fewer profits that can then be taxed by the exchequer.

18:30So I do think we are losing something. And the last point I'll make is this. When companies are listed on the public markets, you and I can participate in that capital appreciation. We just buy the stock. If it's in private hands, it's effectively inaccessible for you and me. And for somebody who wants to get involved, this costs 2 % plus 20 % carry for the private equity firms. In other words, we don't democratize wealth when these companies stay in private hands. And I think that is probably a broader social question. Yeah. So listeners, even if you thought you didn't care about this stuff, you kind of should.

19:10I think that it's a real shame that the policies of governments have been in effect and inadvertently to marginalize public markets. And I think only now, when I speak to policymakers in the UK, I think only now has it dawned on them just the damage that has been wrought over two or three decades. Can you put the toothpaste back in the tube? Well, let's hope for some more animal spirits next year, but we're going to have to wrap it up there, and we're going to be back in a sec with Long Short.

19:49Alrighty, now it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Craig, as it's Christmas, I believe you've got a long and a short. Okay, I do. So long, melodic house music. I think everyone wants to listen to EDM nowadays, but melodic house has a slower beat, and it's better for people of my generation. I'm Gen X. We like to have slightly catchier hooks, a more luscious soundscape around listening to EDM music. This is a good choice. Yeah. Yeah. My short is the Fifth Republic. France is failing before our very eyes, despite having what I would regard as, you know, one of, if not the best global leader in the Western world.

20:40The country has a sizable and gargantuan budget deficit. And it's not as if it doesn't tax its population enough. There's no scope really for spending cuts, even though it does spend a lot of money. I think we're starting to see the limits of their social democratic model, if you will. And I am worried that, you know, despite good leadership, very competent leadership, the country seems to be in a spiral of political dysfunction. This is a good long short, long melodic house music, short France. Yeah. Yeah, it's a winner. Listeners, that's it for today. We're still consuming our mint pies. Thank you to Craig.

21:25Thank you so much for coming in. Thank you. Very kind of you. And we are crawling to the end of the year. But listeners, we're going to be back in your feed on Thursday. So listen up then. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's Global Head of Audio. Special thanks to Laura Clark, Alastair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer.

22:03I'm Katie Martin. Thanks for listening.

22:21We'll be right back.