The IPO market’s soft opening

Episode Summary

Executive Summary: Goldman Sachs’ David Ludwig describes the IPO market as in a “soft opening,” with high-quality companies again accessing capital and trading near or above issue prices. He argues the revival is gradual, supported by improved investor sentiment, but still constrained by macro volatility. He expects broader reopening in 2024, with private markets, sponsors, and regional markets also improving unevenly.

Main Topics: IPO Market Soft Reopening (Priority: 5/5): The transcript frames recent IPO activity as an early-stage recovery rather than a full reopening. Ludwig says strong companies are finding efficient access and supportive aftermarket demand, but the market is not yet broadly open to all issuers. Investor Sentiment and Risk Appetite (Priority: 5/5): Investor confidence has improved as recession fears eased and soft-landing expectations grew, though recent rate and inflation concerns have led to some de-risking. High-quality growth companies still attract capital when they come public. Company Sentiment and Timing (Priority: 4/5): Companies are increasingly considering public markets again as volatility stabilizes and pricing improves. However, Ludwig stresses that the market remains selective and that broader access will build gradually over time. Why 2021 Is Not the Benchmark (Priority: 5/5): Ludwig explains that 2021’s IPO boom was driven by extraordinary liquidity, stimulus, and negative real rates, making it an exceptional and unlikely-to-repeat period. He says current underperformance should be judged relative to broader sector moves, not that era. Private Markets as an Alternative Capital Source (Priority: 4/5): He highlights the growth of private capital options—debt, convertibles, preferred equity, and other structures—as helpful for companies needing runway or employee liquidity. Some firms used the downturn to become leaner and stronger. Sponsor Liquidity and Capital Markets Tools (Priority: 4/5): Private equity sponsors continue to need IPOs as a monetization path, though alternatives like sales and high-yield bonds also matter. Ludwig says the reopening of IPO and debt markets could restore flexibility for sponsors. Regional Recovery: EMEA and Asia-Pacific (Priority: 3/5): The recovery is uneven globally. EMEA shows selective activity; Japan is notably strong; Asia ex-Japan remains slower due to China conditions; India has performed well, especially for monetizations.

Key Arguments: The IPO market is reopening gradually, not suddenly, and recent deals show that high-quality issuers can still price well and trade near issue price or better. Investor appetite is improving because many portfolios are still underweight risk after recession fears eased, and they want quality growth exposure. The 2021 IPO environment was distorted by extraordinary stimulus and negative real rates, so weak post-IPO performance today should not be taken as proof that the IPO asset class is broken. Private capital markets have become more diverse and useful, giving companies multiple ways to raise capital, extend runway, or provide liquidity to employees. Some private companies used the tougher environment to become more disciplined and better businesses, which may make them stronger public-company candidates later. Sponsors still need IPOs for portfolio liquidity, and an improving public market could restore one of the key exits in their toolkit. Global capital markets are recovering at different speeds: Japan and India are relatively stronger, while Europe and China-related issuance remain slower. A broad-based IPO reopening is more likely in 2024 than in late 2023, assuming macro conditions stay supportive.

Data Points: NASDAQ performance since Labor Day: Down 3% to 5% - Ludwig cites weaker recent equity performance as a reason investors are more patient on IPOs. S&P performance since Labor Day: Down 3% to 5% - Used alongside NASDAQ declines to illustrate a more volatile market backdrop. Japan issuance increase: About 4x - Ludwig says Japan has been especially hot relative to the past, with issuance up roughly fourfold. Federal Reserve stance: Higher for longer - Referenced as a recent macro concern affecting company and investor sentiment. IPO timing outlook: 2024 - Ludwig repeatedly says a broader IPO market reopening is more likely next year than by the end of 2023. Backlog duration: 12 to 18 months - He notes the firm has kept a large backlog because little was taken out during the prolonged slowdown. Recording date: Thursday, September 21, 2023 - Podcast episode timestamp provided at the end of the transcript.

Pivotal Quotes: "I would say we're having a soft opening of the IPO market." — David Ludwig: His central characterization of the current IPO environment. "The environment that we saw in 2021 is going to be repeated. I don't believe the environment that we saw in 2021 is going to be repeated." — David Ludwig: His view that the 2021 IPO boom was exceptional and unlikely to return soon. "I think overall, we're heading in the right direction that over the rest of the year, we're going to see some very high quality companies come public." — David Ludwig: His forward-looking outlook for late 2023 and beyond.

Implications: The IPO market is thawing, but selectivity remains high. Companies with strong fundamentals and sponsors with flexible exit options should benefit first, while broader momentum likely depends on stable inflation, rates, and geopolitics into 2024.