THE spreading of the rally across equity markets into more than just a handful of stocks is making room for more initial public offerings, according to Goldman Sachs Group’s global head of equity capital markets.
“We have been in a pretty unique market,” David Ludwig told Bloomberg News in an interview. The veteran dealmaker pointed to stiff competition for investors’ cash from high, risk-free interest rates, as well as money managers “getting paid to own a small group of mega-cap technology companies which are growing at scale, investing in AI and returning capital.”
“That made the bar to buy IPOs for investors very high,” Ludwig said.
Despite IPO volume so far this year falling short of what many were anticipating, Ludwig included, stops and starts in the flow of listings have masked a steadily improving picture by other metrics. For example, the discount associated with IPOs – a measure of how new listings have been valued compared with their already-public peers – has shrank. It’s down to roughly 15 per cent from 25 per cent, Ludwig said.
“The markets are open, they’ve been open for three years,” he said. “Our job is finding where equilibrium exists between buyers and sellers, and the gap that has existed for a while has been shrinking and currently sits at a tighter place than it has been for some period of time.”
Magnificent Seven
Several of the sizable US deals Goldman Sachs led this year have produced eye-catching returns, like safety testing firm UL Solutions whose shares have popped more than 80 per cent after its US$946 million New York listing, and Zeekr Intelligent Technology Holding whose stock is up 43 per cent since the Chinese EV maker’s US offering raised US$441 million.
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Yet it’s not hard to see why some companies have been reluctant to try their luck going public, with the so-called Magnificent Seven group of large tech stocks rising nearly 200 per cent since the end of 2022 versus the benchmark S&P 500’s 54 per cent return over the same stretch.
Some US$35.5 billion has been raised via first-time share sales on US exchanges this year, a 61 per cent jump from the stretch seen in 2023 through Oct 6, but still well below the average in the decade before the pandemic, data compiled by Bloomberg show.
The sectors of companies tapping the IPO market as well as the investors participating are broader, and deals are performing better, Ludwig said.
“But it’s still a little slower than I expected coming into this year and that will likely continue through the fourth quarter,” he said. “IPO market volumes are still down compared to 2019, so we have room to go.”
Expectations that the Federal Reserve would start its rate cut cycle were already helping even before the 50 basis point reduction was announced. The small-cap Russell 2000 and the equal-weight S&P 500 saw sharp gains of roughly 9 per cent in the third quarter, besting the tech-skewed S&P 500 by the largest margin in more than a year, offering reassurance to companies that have been kicking the tyres for first-time share sales.
Shifting expectations
With a critical US presidential election less than a month away, and markets shifting expectations for the string of anticipated rate cuts, next year is firming up for another step towards a normal IPO market.
“Once you get into 2025 and investors have more certainty, it feels like it’ll be an incrementally exciting year that looks more normalised outside of any large negative surprises on the geopolitical front,” Ludwig said.
Bankers across Wall Street have touted a pick up in meetings with both sellers and investors eager to put money to work. Making sure companies are engaging with prospective investors and spending enough time with them before going public is increasingly important, Ludwig said.
“This is not a market where you just flip public and everything happens.” BLOOMBERG
