Equity Capital Markets

Key takeaways from August’s volatility

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Nadine Yang: AI certainly remains a theme, but it feels like less of a driver of performance as investors really start to focus not just on the AI opportunity, but how will those AI products and initiatives ultimately change the P&L of those companies. Overall, investors continue to reward high quality, durable, and profitable growth stories in this much more volatile macroeconomic environment.

John Zimmerman: Hey, everybody. You are listening to What's the Deal? our investment banking series here on JP Morgan's Making Sense podcast. I'm your host, John Zimmerman, a vice president on our private capital markets team. Today we're recapping the recent market activity in equity capital markets with Nadine Yang, an executive director in our technology equity capital markets group based in New York. Nadine, welcome to the podcast. Great to have you.

Nadine Yang: Great to be here.

John Zimmerman: So, Nadine, before we dive into the market discussion, I think it would be helpful if you could introduce yourself to the listeners. Share a little a bit more about your career, here at JP Morgan.

Nadine Yang: Definitely. I joined JP Morgan in 2015 in Strategy after a four-year stint in consulting. And since then, I've had a diverse set of roles across equity capital markets, private capital markets, and financial sponsors in Hong Kong and New York. It's been a great journey so far.

John Zimmerman: Great, let's jump into the conversation. We've had a dramatic start of August in global equity markets. Could you provide a quick recap of the market activity over the past few weeks?

Nadine Yang: Yeah. So, it's been a bumpy ride, and I think it's likely going to be a bumpy ride for a bit longer. The first full week of August started off with equities logging their worst daily decline since 2022. And volatility spiking to 65. The highest levels since COVID broiled markets in 2020. This was largely driven by disappointing macro data, concerns of weakening growth, and re-pricing of recession probabilities, as well as the global unwinding of the Yen carry trade.

Nadine Yang: Our colleague from our asset and wealth management division as well as frequent guest on the podcast, Michael Cembalest, has shared that the conviction in the AI driven rally was so uniformly held that by mid-July, short interest on the S&P and Nasdaq practically disappeared really contributing to the lack of volatility in the market to date. We also heard from mutual funds that they had been positioned defensively heading into earnings given what they perceived to be over heating in the broader markets.

John Zimmerman: Gotcha. Interesting. And then, when you think about the turbulence in August, how did you see or how do you characterize the market response following that initial decline?

Nadine Yang: So, when we first saw a lot of the volatility, we felt like a lot of this was very much technically driven, underpinned by some fundamentals. And I think we ultimately ended up being right. We saw a quick recovery in the markets. And after this short-term volatility, logging the best two-day run of the year on August 8th and 9th. The market continued to accelerate on the back of strong macro data, which included a good inflation print, resilient growth numbers, favorable July end earnings, as well as dovish Fed rhetoric. And the market ended up closing the week ending July 16th with the strongest one-week performance that we've seen since November 2023. So, John, now that we've talked a little bit about what was happening in the broader equity markets. What are you seeing on the private side?

John Zimmerman: Yeah, thanks Nadine. I think the private capital markets remain active across all fronts. I think as a private capital group here at JPM, we've raised a little over 15 billion of capital year-to-date on behalf of our clients. We're busy with our traditional growth capital and pre-IPO mandates for our private clients, and have active dialog around PIPEs for acquisition and catalyst-driven financing for our public clients. Sponsor secondary opportunities, particularly within mid to late-stage, more mature private companies, predominantly in software, remain very active and interesting to us. And then lastly, our special situations business, what I'll call capital solutions or hybrid capital opportunities, remain very active. We're working with a number of issuers, both public and private, on structured capital solutions to provide non- or less dilutive equity and credit-oriented capital to support growth, and then a broader capital structure refinancing, so overall I'd say we're feeling pretty optimistic. We really like the- the quality of opportunities we're actively working on right now and see our pipeline for the second half of the year, I mean, at this point really Q3 and Q4 post Labor Day as really exciting. So, I'd say we're in prep mode now, but looking forward to a fairly active rest of 2024.

Nadine Yang: That's great to hear. Thanks for that, John.

John Zimmerman: Shifting our focus to the technology sector, what trends are you observing there?

Nadine Yang: Yeah. So the major scene since 2023 is really been the out-performance of large cap stocks. Now, that out-performance continues to be highly concentrated in select stocks. And I'll give you one data point, which is that only 20% of the companies in the S&P are actually out-performing the S&P today. That's the lowest level it's been since the 1990s, and that's compared to what it has been historically, which is roughly around 40%. The mag seven in particular continues to out-perform and just to know Nvidia driving the largest performance gains year to date. It's up over a 150%, followed shortly by Meta, which is up over 50%.

John Zimmerman: Nvidia is interesting in that we see the look through from some of the publicly traded AI stocks is definitely being reflected in the private capital markets, both from an interest level, but I think from an evaluation perspective as well. I think you're also seeing some private AI businesses. You've got a lot of private AI businesses that feel like they're in a bit of an AI crosswind. Maybe talk a little bit about evaluation. How should we think about current evaluations for AI-related stocks? I mean, some of the volatility is going to play into it of late, but talk to us more about what you're seeing on the evaluation side of things.

Nadine Yang: Yeah. And maybe I'll make one comment more broadly speaking, which is that at the end of the day, the equity markets, particularly technology equity markets, growth is probably the number one focus for investors, and ultimately for evaluations. Evaluations for AI continue to reach record levels. And just to give you a sense. The average price to book ratio for semis related stocks over the past decade has really been between two and four times historically, but has reached 12 times today. And that's because of the level of visibility in terms of growth that a lot of the investors have for each of these businesses. Across tech more broadly, we are still below record evaluation levels from 2021, with the exception of some of those best-in-class growth stories. And the number of tech companies trading above a 15 times revenue multiple is 90% lower than where it was in 2021. It was 63 companies in 2021 versus just four today. I think at the end of the day, when we look through what's going on in the public market back to the private market, it's really about that visibility into growth and what are the macroeconomic factors and business-specific factors that are gonna drive investors to be able to underwrite those growth stories.

John Zimmerman: Totally. I think from the private capital market lens, we are seeing that bid-ask on valuation tighten up a bit where it sounds like maybe even late last year, a little bit into early this year we're still struggling a little bit to marry investor expectations with issuer expectations and then thinking through, "Okay, are there ways to introduce a degree of structure to meet in the middle?" But it does feel like a rather stable, dare I say, public equity environment, which obviously hasn't been the case for the past couple months, is lending to that bid-ask tightening up a little bit. Maybe switching gears here, just thinking a little bit about earnings. So we just came out of earnings season. Any themes you picked up on your side this quarter, how they compare to previous quarters, maybe even a look through of what that's gonna potentially mean for deal activity in Q4 and I guess for the remainder of Q3? But what was your take on earnings and then what do you think the look through rate is for the rest of the year?

Nadine Yang: Yeah, so overall earnings were stronger than we expected, and EPS growth actually came in better than we originally estimated at roughly 8% year-over-year. The other key takeaway that we saw was a broadening in earnings delivery with the S&P 500, excluding the Mag 7, delivering the first positive EPS growth that we've seen in over four quarters. We're also seeing just from a number of data points throughout the earnings season indicating a cautiously stabilizing spend environment, particularly for software, which has really been the main driver behind lower than expected growth expectations for a lot of software and technology services companies. So overall, really positive and exactly what we were hoping to see as we look forward towards the change in the Fed interest rate curve.

John Zimmerman: So overall sounds pretty positive. Any areas where we saw general underperformance?

Nadine Yang: Yeah. Well broadly we see earnings this quarter as being robust, some metrics have underperformed, including the percentage of companies beating sales estimates. That's been lower than what we have seen historically. Within tech specifically, certain subsectors have definitely underperformed, specifically calling out tech services which had the lowest percentage of companies beating earnings at roughly 41%, and that's largely driven by some of the themes that I called out earlier, which is really around the visibility to IT spend against both an uncertain macroeconomic environment as well as enterprises pressing pause on new spend as they evaluate the AI landscape.

John Zimmerman: Got it. And then thinking through how we opened this section of the pod and thinking about the look through from an investor's perspective, working through earnings and then also transitioning to guidance, sitting in the investor's seat now, what have you heard from investors? How do you think investors are reacting to the latest slate and what do you think that means for their general participation for the rest of the year?

Nadine Yang: Investors have mostly been focused on the magnitude and sustainability of performance as a read through to future quarters. For companies that have missed or offered more conservative guidance, investors have been focused primarily on the drivers of that underperformance and whether the challenge macro environment will continue to put pressure on financials, and overall we've seen the bar get that much higher for companies in terms of what they're actually showcasing the forward look looks like. AI certainly remains a theme, but it feels like less of a driver of performance as investors really start to focus not just on the AI opportunity, but how will those AI products and initiatives ultimately change the P&L of those companies. Overall, investors continue to reward high quality, durable, and profitable growth stories in this much more volatile macroeconomic environment.

John Zimmerman: So given market conditions, so we've got two weeks to Labor Day give or take, so I think it feels like it's gonna be quieter. I mean, you tell me if I'm wrong, but let's say two weeks to go. Expectations post-Labor Day, rest of the year, do you think we'll be busy? I mean, I know we've got a lot of businesses that were staying in front of their... monitoring their windows. I think on the private side, it feels like we're gonna continue to be busy. We've got some higher quality opportunities I think we're gonna bring to the market post-Labor Day. I think we're largely gonna sidestep the election on the private side. I think in your world, you're gonna see... Uh, you tell me, but I think much more relevant, but how do you think about post-Labor Day expectations around activity? And then also maybe touch on the election a bit, and if you think that might be a factor.

Nadine Yang: Yeah, absolutely. So big macroeconomic or geopolitical events definitely put pause in the public markets just because of the element of surprise or uncertainty resulting from those events. But coming back to school we will be cautiously optimistic. Certainly given the recent stronger US macro data that we saw last week as a result of a recession fading, it certainly feels like we will continue to see strength through the rest of the year. There are obvious broader geopolitical and election concerns that we'll continue to monitor, and I do think that that probably means issuance does slow down or at least people start to evaluate their windows more cautiously mainly on the election. The outcome could bring some changes to things like trade policy, foreign policy, regulation, and fiscal and tax policy through higher tariffs and increased fiscal spending with the risk of higher inflation as a result of this. That said, disinflation trends and ultimately the start to the rate cutting cycle, which the market actually expects to happen in September, should definitely help drive outperformance in the US economy through the rest of the year just by virtue of a lower cost of capital for many of the companies that are reinvesting in the economy.

John Zimmerman: That's helpful. And looking at the stats, right, so we've got equity issuance up 50% year to date driven by a 200% increase in IPO volumes and 100% increase in convertible volumes. Thinking about those two data points, right, like, a dramatic rebound I think on both products, how do you square that with respect to just all the volatility we've seen geopolitically, economically? The market and volumes continue to be, for lack of a better term, [inaudible 00:19:17] thus far. How should we think about just the trends in the IPO volumes and the convertible volumes being up fairly strongly this year?

Nadine Yang: Yeah, so I think we definitely expected to see volumes up, especially on the back of what was a very quiet 2023. This year we've had 45 IPOs raising $24 billion of capital, and eight of those IPOs have been in tech specifically. The total IPO issuance, however, is still not in line with the five-year average if you exclude COVID, and I do think that we expect 2025 to be much more in line, potentially ahead of that historical average. For the remainder of the year we expect equity issuance largely to be driven by opportunistic follow-ons, blocks as well as converts, which has really been the product du jour. And that's largely just because IPO volumes do tend to drop off in Q4 of an election year, specifically around the election. With that said, preparation is key, and many of our potential IPO issuers are going to start to get ready for 2025.

John Zimmerman: Yep. Totally, and I think what's also interesting is our focus on thinking through some of our mid and late stage private clients who were maybe an IPO this year, thinking about next year, and then trying to calibrate if a private capital solution maybe one more pre-IPO round could be interesting, right? Could you diversify your shareholder base another notch, bring in a late stage mutual fund or cross over investor that could be additive to you at IPO, right? Just some things around giving the business or providing the business with another shot in the arm, some growth capital. It could buy a little bit of time to push out the IPO window if needed. And to your point, I think bridging to that visibility and building a P&L and a balance sheet that public equity investors are gonna be highly receptive to, and then could that be amplified or solved? Or could a company be fairly intentional with doing a pre-IP round now to give them some breathing room or some more optionality heading into 2025 is definitely something that we're thinking more about holistically with a few of our pre-IPO clients. Well, to recap today, we dived into recent market activity in equity capital markets, discussed the performance of tech stocks, examined earnings themes, looked ahead to the rest of the year, talked a little bit about our privates business and what we're seeing there. Huge thanks to Nadine Yang for joining me.

Nadine Yang: Thanks for having me here.

John Zimmerman: Thank you for the listeners for turning into another What's the Deal? episode. We hope you enjoyed the conversation. I'm your host John Zimmerman. Until next time, take it easy.

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What’s Scott Galloway’s secret to good leadership?

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Alex Watkins: Hello and welcome to our investment banking podcast, What's The Deal? I'm Alex Watkins, co-head of International Equity Capital Markets, and I'm hosting today's episode from JPMorgan's Techstars Leadership Forum. Here we bring together founders, CEOs, and investors in the tech ecosystem to discuss key trends changing and impacting the tech industry, global markets, and the world over. I'm thrilled to be joined by Scott Galloway, entrepreneur and professor of marketing at NYU Stern School of Business. Scott, welcome to What's the Deal?

Scott Galloway: Thanks for having me, Alex. First off, you're co-head of-- what was the term again? Institutional. What do you do?

Alex Watkins: Equity Capital Markets.

Scott Galloway: Dude, you look 18. What is the deal here? If I had your hair, I'd be the junior senator from Pennsylvania right now. Seriously, man. Well done. You're crushing it.

Alex Watkins: Moisturize, drink Evian. What can I say?

Scott Galloway: You're crushing it.

Alex Watkins: I've had a lot of work done.

Scott Galloway: There you go.

Alex Watkins: Let's start at the beginning. Beginning of your career, you graduated from university and you worked at a investment bank. Talk to us about that experience and how it's shaped your career today.

Scott Galloway: So, I was at UCLA and my roommate, who I was very competitive with, decided he wanted to be an investment banker. That was just like so important to him and I thought, "Well, if he wants it, I'm going to get it." And so I had no idea what investment banking was. I interviewed with a bunch and I ended up at Morgan Stanley. And I was in fixed income for two years. It was a really good experience for me. One, I learned, that's not what I wanted to do with the rest of my life. I think your 20s is about workshopping and figure out what you want to do, and part of that is figuring out what you don't want to do. And also, just the attention to detail, the professionalism, the discipline. I learned about the markets, that always resonated with me. I had some people take an interest in my career who I've stayed in touch with, but I knew I didn't want to do it, but it was a great experience. I think that kind of first boot camp, hardcore experience right out of college, I would recommend it for anyone.

Alex Watkins: Certainly, and still has a very strong work ethic and knowledge of the markets.

Scott Galloway: 100%, yes.

Alex Watkins: Since then you went on and founded a number of companies, Prophet, RedEnvelope, and L2. What advice would you give the founders that we've got in the room today about building companies?

Scott Galloway: The basics are, you got to be more risk aggressive, find good partners. I think the lows are really low. The highs are really high. I think the key to entrepreneurship is probably resilience. That is, you're going to get beaten in the face, you're going to have near-death experiences. Try to focus. Let the anxiety that you're going to register as part of being an entrepreneur, make that motivating. Try and translate it into actual productive work. Find good partners. Find a few core groups of people who are really talented. Give them big pieces of the business. If you want people to act like owners, you got to treat them like owners. The only thing I've been able to suss out when I reverse engineer the nine businesses I've started to success and failure is when they were started, when I started a company in a recession it usually succeeded. When I started a company in boom times it usually failed. Because the DNA at the very outset of being cheap, getting to hire people and find real estate and find resources for less money in a recession imprinted the right DNA, but throwing nickels around like they're manhole covers, having a certain amount of emotional, mental resilience, trying to really find and hold onto good people and give them large equity stakes, recognizing greatness in the agency of others and give up this myth of balance. I think it's very competitive and if you really want to make a small company work, you should assume that for the better part of a decade, maybe even two decades, you're primarily going to do nothing but work. That's not what millennials or Gen Z want to hear. But I've never been talented enough to make anything successful unless I threw myself 110% on it.

Alex Watkins: Do you think you've got any more startups in the locker? Do you think you're going to do any more in the next few years?

Scott Galloway: Oh, no way. As you get older you get more rational, you collect dogs and kids, you need some balance in your life. You don't have the physical endurance. When I was at Morgan Stanley, and I'm bragging now, I was the first analyst they hired out of UCLA. They hired at Stanford and Berkeley and then all the Ivys. We romanticize entrepreneurship. On a risk-adjusted basis, you're better off going to work for JP Morgan than starting a business. My stallmate, my first boss at Morgan Stanley is now the vice chairman. I would consider myself in the top 1%, if not the top 0.1% of entrepreneurs. I've had some exits, some nine-figure plus exits. I think we ended up in the same place economically but my path involved a lot more ups and downs and a lot more stress. The American corporation as a platform is still the premier place to get rich slowly.

Alex Watkins: Everybody's talking about AI, almost there's some fatigue creeping in. You've joined us at Techstars today. What would be the key takeaways from AI from your perspective and what it means for the guys in the room?

Scott Galloway: The honest answer is I don't know yet. I'm an optimist. I think that there's certain categories that will be very much disruptive. I think the biggest opportunity is the intersection between AI and healthcare where prices have increased faster than inflation for 30 or 40 years but satisfaction with it's gone down. It strikes me that there's just a ton of opportunity between AI and healthcare. It'll destroy jobs in the short run, but I think it'll actually, like every other technology, create more jobs. Automation was going to be the end of the American middle class, and it's definitely had an impact. There's fewer jobs on the shop floor, but we couldn't have envisioned heated car seats and car stereos. I think the automobile industry globally has actually grown in employment. We thought the weaving machine was going to put every weaver out of business, and actually, it grew the business. So, I'm an AI optimist and I don't see any reason why it can't be used as a missile shield, as well as missiles. The place I am worried about it is next year around election misinformation, specifically out of the GRU in Russia who will see the fastest blue line path to victory is the reelection of Trump. I think you're just going to see a ton of misinformation and spending on these platforms that have what I'd call amoral management, who will cash checks and then wring their hands and pretend that they're really upset about what happened after they've cashed the checks. I just see the atmosphere lead to a massive amount of AI-driven misinformation at the beginning of next year.
Alex Watkins: Turning near term into the economy, a lot's being said about the slowdown, are we seeing one? I saw you talk recently and you seem pretty bullish, pretty optimistic. You're talking about the Patagonia vest recession, the nothing untoward, and you weren't seeing it in the data. Can you talk a bit about that and your optimism?

Scott Galloway: Yes. Every year I do a prediction stack for the coming year in October, and I said last year, I predicted that the recession wasn't going to happen. That the recession was going to be sequestered to the growth part of the economy. It has a lot of headlines, but if you look at the actual number of jobs, it's not a lot. The great taste and low calories of cutting costs while maintaining growth, which big tech has adopted, has resulted in just earnings growth. I think that they're going to have the most profitable quarters the back half of this year. Unemployment is historically strong. I didn't see any evidence of a recession other than the small unemployment or layoffs in the tech sector. The majority of economists have now shifted to a soft landing, which lends me to believe that in 2024 we'll experience a recession. It feels like we're due. Student loan payments starting up again. I don't feel the impact of this 525 basis point increase has really been absorbed in the economy. I think AI is deflationary and will give people less confidence to ask for an increase in wages.  Also, I think it's a good thing. I think that people my age benefited. The reason I'm economically secure was the last recession in 2008. I was able to take the nuts I'd saved as it was coming into my prime income earning years and buy Apple and Amazon. Since then they're up 30 and 50X. And over the last few years, we basically pulled out our kids and our grandkids credit cards to juice the market and make sure we didn't go into recession. That's nothing but entrenching the incumbents. The young people need a recession. How the hell do they buy a home right now? How do they buy stocks? So I think a recession is a healthy, natural part of the cycle. We're just due. The only thing that counters that is an election year. Usually the incumbent administration pulls out the credit card again. I just wonder if we're running out of bullets or ability to dodge a recession. Anyways, my prediction is 2024 we're going to have one, but nobody knows.

Alex Watkins: Okay. Last question. You sit on a number of boards, from tech to media to education. Given your board experiences, what advice would that lead you to give for the CEOs in the tech sector?

Scott Galloway: I think leadership comes down to three things. I think you have to demonstrate excellence. You have to be the best in the room at something. Whether you're the best salesperson, you understand the numbers better. I think always investing in a certain domain expertise, they have to demonstrate excellence. Two, hold people accountable. We don't talk about this a lot, but I think you have to make quick decisions and hold people accountable. I think everyone in a company wants to know that their work is rewarded and look left and look right and think, I don't have to like the person, but I have to understand that they're here. So I think good CEOs hold themselves and other people accountable. The last thing is what I'll call a certain amount of empathy. That is, loyalty is a function of appreciation and greatness in the agency of others. The people who become CEOs have a really solid group of people who stick with them and even maybe go with them to other firms and are loyal to them. One of the ways you can demonstrate appreciation is empathy. That is, when I was a younger CEO, I thought everyone must be like me. That is, I wanted to be very rich and awesome. I wanted to be on the cover of magazines and I wanted to have a lot of money. That was it. I didn't want to change the world. I didn't want to make the world a better place. That was all I wanted. I assumed that's what everyone else wanted. And what you find out as you get older is that some people get a lot of reward. They want to manage people. Some people are willing to give up some compensation so they can coach little league and have more balance in their lives. Some people want some of that fame that you're getting as the CEO. That it means a lot to them to be on stage every once in a while. I think just demonstrating a little bit of empathy that says, I'm going to take the time to get to know you and get to know what you really value. I'm going to foot my efforts in recognition to demonstrating to you that I get you, I understand you, and I'm going to try and invest in you. I think that creates a lot of loyalty, just a little bit of effort. Accountability, excellence, empathy.

Alex Watkins: Scott, it was fantastic to have you on our podcast today. Thank you so much.

Scott Galloway: Thank you, Alex.

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IPO comeback: What’s driving the uptick?

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David Rawlings: Hi. You're listening to What's The Deal, our investment banking series here on J.P. Morgan's Making Sense podcast channel. I'm your host, David Rawlings, Country Head of J.P. Morgan in Canada. Today, we're exploring the current state of the IPO market. Joining me is my friend and colleague, Keith Canton, who leads Americas Equities Capital Markets. Keith, welcome.

Keith Canton: Thanks, David. Really appreciate you having me today. 

David Rawlings: Listen, before we dive in, why don't you just spend a minute to tell our listeners a little more about you and your role here at J. P. Morgan?

Keith Canton: Yeah, absolutely. I've now been in banking for over 20 years, but I actually started my career in publishing at Sports Illustrated Magazine. Currently, I run the Americas Equity Capital Markets practice, so really responsible for all of our IPOs, public equity, but also our private equity placement business as well. When I joined J. P. Morgan nine years ago, I was hired to actually found and build out that private capital markets platform.

David Rawlings: So we get lots of questions from the 20-year-olds who say, "How do we get into banking?" How did you make that shift?

Keith Canton: Well, coming out of Sports Illustrated, I was not quite qualified to make the leaps specifically into banking, so for me my route was going into business school, and I ended up joining Lehman Brothers as a summer associate in 2001, and a full time associate in 2002. 

David Rawlings: And where did you go to school?

Keith Canton: I went to Fuqua School of Business at Duke University.

David Rawlings: Go Blue Devils.

Keith Canton: Yes, sir.

David Rawlings: Awesome. Listen, I had Lorenzo Soler, who is our Global Head of Equity Syndicate and a very good partner of yours, and we talked about IPOs. Let's just play a clip from last year's discussion with Lorenzo.

Lorenzo Soler: In terms of what our investor's looking for, what types of quality businesses are they prepared to buy, I would say there's massive focus now on structural growth stories with profitability. The days of 30 to 40% top-line with less of a focus on bottom-line are behind us for now.

David: What he said was there was this shift away from high growth unprofitable to more disciplined and profitable. We'll get into this in a second, but when you think about your day, volume is about 15 billion up materially from last year. So I shift to you, is the current activity consistent with that approach?

Keith Canton: Yeah, I think Lorenzo was spot-on. When you take a step back, you know, on the face the market looks quite positive. The Nasdaq, S&P are both effectively at all-time highs and really equity capital markets are up across all products. Follow-ons and blocks are up a combined 65%, converts up about 65%. And I know we're gonna focus here on the IPO market, but the IPO market right now is running about 2X what it ran last year. And you're spot-on, $15 billion raised year to date. First is just under 20 billion for all of last year. So we feel quite good about where things are.

David Rawlings: Now, I would say 2023 that's not your bench-mark years because that was still a tougher year, '22 and '23, but 15 billion, if you put that into the context over a longer period of time, it feels pretty healthy?

Keith Canton: Yeah, I mean, the way we think about it is pre-COVID we were running in the mid-40s from an IPO volume standpoint. That clearly jumped up to a peak of well north of a hundred in 2021, then we dropped to seven. And so we're coming off of all-time lows, 7, 20. And based on what we're seeing, we would expect the IPO market to end up in the 30s from a volume standpoint.

David Rawlings: Good, so almost back to normal. But you know, it's been dominated by some big deals, and you might wanna highlight a couple of those particular transactions for our audience.

Keith Canton: You're absolutely right. I mean, when we think about where we are in the market, maybe just taking a step back, deals are getting done and they're getting done well. The deals are working, they're getting done across all sectors. And to your point, they're actually getting done in size. This year, the average deal, the median deal when you take out biotech is close to $700 million. We're seeing quite sizeable deals and this year we've already had four or five billion dollar plus transaction, which is really showing the investor sentiment to get transactions over the finish line.

David Rawlings: And when you say investor sentiment, take that one step further. Is it a different type of investor that's showing up today versus last year? Like what's the composition and how's that changing?

Keith Canton: You know, I think the biggest positive we've seen this year is really much broader participation across the landscape. So the mutual funds have actually started to come back in a very big way. And you're also starting to see generalist portfolio managers come back into the market. And what that does is it really allows for more larger IPOs, particularly those IPOs placed with really fundamental investors. So we're reducing the reliance on sector-focused portfolio managers who might be size-constrained and hedge funds who might be more likely to churn in the after-market. And so the marginal IPO dollar, we can actually place that now into stickier hands. So it's really good to see the mutual funds and the generalist PMs come back into the market in a really material way.

David Rawlings: And then what about across sectors, is it consistently strong across sectors?

Keith Canton: Historically, technology is the dominate sector within the IPO market. We're not really there. In this market we've seen five tech IPOs this year out of about 30. So we're seeing broad-spread participation, consumer, industrials, financial services. Insurance has been a big part of the market so far. And in healthcare. Healthcare services meets Lorenzo's threshold of big scale profitable businesses, but you're also seeing biotech as well. We are seeing deals get done across all sectors. But interestingly, deals are also working, which I think is also leading investors to wanna get back into the IPO class. This year, if you strip out biotech, 80% of the IPOs in 2024 are above issue price and the median IPO is up about 20%. So the deals are working and that's really leading people to view the IPO product as really a source of alpha once again.

David Rawlings: All right, so let's strip that down in a few different ways. So you mentioned scale and profitability. I've also heard you talk about durability. So just go a little deeper on kinda what that means.

Keith Canton: When we think about what is an attractive IPO candidate, we always come back to scalability, profitability, and durability. So, are the companies really sizeable? If not, can they become sizeable companies? Are they profitable today or are they on a very clear path to profitability in the near term with a high degree of visibility? And are these durable business models? Are they providing a service or a product or solving something that is really gonna be around if the company decides to remain independent for the next 5, 10, 15-plus years? Do the business model really have durability to them? And what you're seeing in the class of '23 as well as the class of '24 IPOs, companies are checking really all three of those boxes. And if you're doing that, you're gonna get rewarded with an appropriate valuation but also the right types of investors. And if you can only check two of those boxes, and we've seen a couple of examples of big companies real business models but not yet tipping into profitability, those companies are pricing and seeing much more muted after-market performance.

David Rawlings: And then when you talked about after-market performance, why is that important?

Keith Canton: I thnk it’s important for a couple of reasons. First and foremost, people tend to think of the IPO as the event, but it's really only the first step in a journey to being a public company. On average, most of the IPOs are selling anywhere from 10 to 20% of the company, which means you get 80, 90% plus that still needs to be potentially monetized over time. And so if you show some early gains to investors and you perform quarter after quarter, you're gonna have a far bit of investors who are gonna be there to help you monetize your stake over time and really get you the maximum value for that residual 80% stake versus trying to maximize out that first 10 or 20% stake.

David Rawlings: Okay. When you think about the potential headwinds, there's geopolitical tensions and other things going on, what are you hearing in terms of pushback from the investors? And can you put some numbers around that?

Keith Canton: I think investors want to deploy capital but they're mindful that we are still facing headwinds. Inflation and labor cost are still up. And that has a big impact in the consumer sector. We do have geopolitical risk, which is incredibly hard for an investor to handicap, and to price in the right amount of risk premium there. And so when you think about all that, investors wanna make sure that they're coming in at the right price. And so what we've experienced is the traditional IPO discount has widened out pretty materially. Historically, we would’ve thought about a traditional IPO discount of plus or minus 15% when measured against what the market perceives to be the closest comparables. In this market, we're seeing IPO discounts of 20, 25, in some cases just north of 30% on that same basis. So investors are incredibly disciplined to make sure that they're getting in at the right entry price. And part of this goes back to the lessons that they learned from the class of '21 IPOs, where 3/4 of those IPOs are still underwater today. So investors, I think, are showing a heightened degree of discipline in today's market.

David Rawlings: Well, to your point, it seems to be working, as long as the company has appropriate scale and that business model is durable, there's interest. It's just you have to figure out at what price, and I think finding that intersection is what we do really well.

Keith Canton: I think that's spot on. We're very fortunate. We get to see a lot of high quality companies, and we have the opportunity to tell those stories into the public markets. And so, for us, it's really making sure we get that balance of scaled business that's showing real growth but is also very focused on profitability. And when you take a step back and think about what the market is telling us about profitability, we've seen almost a 5X change in the relative importance of profitability to growth, when we measure those in an analytical way. So the market is very much focused on profitability, but I always come back to the fact that the IPO market is really predicated on growth. It is a growth market.

David Rawlings: You had mentioned your structured equity background. I know you spend a lot of time with private equity and structured investors, and private equity's become a much bigger part of our market over the course of the last several years, across credit and equity. But if you're in this environment where companies need to be more mature, how does that impact them, and what are you seeing as it relates to your market?

Keith Canton: I think the cuurrent setup of large or in profitable companies actually plays quite well to where sponsors historically have invested their capital. When I think about the IPOs we did this year for Viking and UL Solutions, those, I think, provided quite a good readthrough to how sponsors might think about their portfolio companies. Those were both billion dollar plus IPOs. Those were both very profitable businesses with fairly low leverage on a relative basis. But importantly, over 80% of the proceeds in both of those transactions was secondary, back to the existing shareholders. And so if you're a financial sponsor that is really focused on how do I return capital to my limited partners, those two deals in particular, and there's been a few others, really, I think, provide some positive signs of life. And so when we're having our conversations with the sponsor community, we've absolutely seen a pickup in the preparedness of financial sponsors to wanna get their portfolio companies out into the public markets.

David Rawlings: Is it uncommon to see that much secondary stock in an IPO?

Keith Canton: Historically, when you're in a growth market, that would be very uncommon, because the companies really needed to raise the capital to grow their businesses. But in a world where the companies that are going public are already profitable, you really only have a couple of use cases. You can repay debt, you can think about acquisition capital, or you can give the capital back to the selling shareholders. And so just with the shift in the size of the companies, the profitability of the companies that are accessing the public market today, we're actually not surprised to see secondary proceeds be a very accepted use of funds from the buy side community.

David Rawlings: Okay. So that covers more traditional private equity. And how does this impact the venture community?

Keith Canton: The venture community is clearly one of our important constituencies. And what they're experiencing is, they're waiting a little bit longer to access the IPO market because they want their companies to grow into a sufficient scale that they'll be attractive in the public markets. Historically, we would've thought about a company with $100 million of revenue being public company-ready. That was an IPO in '20 or '21. In the current environment, those same metrics are probably closer to $300 or $400 million dollars before you're of sufficient size and scale to really attract mutual fund or a public company investor.

David Rawlings: Got it.  So let's just shift for a minute, here we are, halfway through 2024, as we think about the back half of the year, obviously we got an election cycle which we won't spend a lot of time on, but what are you hearing from investors in terms of their appetite? Do you think this market will remain resilient as we get through the summer and the fall?

Keith Canton: I think the summer and the fall should be fine. When we look at the companies that we have in our backlog, and we take a look at what we believe is gonna come across the street, I think you'll see a pretty healthy issuing cycle for the balance of this quarter, Q2, which is really June. Then I think you'll see a pickup in July, the number of companies are shooting for that July window. And then ultimately, we're gonna get into the fall. And I think the bulk of the issuance will really come in September, October. Most of the clients that we're speaking to really wanna get ahead of the election to the extent possible. And once you get past the election, your windows with the year-end holidays tends to get fairly limited. So I think we'll see a fairly active next two months, and then I think we'll see a fairly active September, October, and then it might be a little quiet then we would historically think about for the balance of the year.

David Rawlings: And my guess is, just given the time it takes to be ready to go public, you've already got a pretty good lens on that.

Keith Canton: We do. I mean, we are having organizational calls and kickoff calls for companies that are looking to IPO in October. And, as we tell our clients, if you really haven't picked your banks, picked your law firm, and are well down the path of the IPO process, you're really looking at 25 at this point.

David Rawlings: Okay. So listen, we've covered a lot of topics. Let's just bring it back home. We're in the advice business. You spend a lot of time giving advice to issuers, you also understand deeply what the investor wants. Can you just talk about what advice you are giving to corporates today?

Keith Canton: Yeah, I think two things really jump out at me when I think about what companies oftentimes don't think about when they're ready to go public. One is, how do you want the public markets to view your company once you're public? What are the KPIs that you wanna be able to tell quarter after quarter, that you wanna be judged on by the market? So start thinking about what those KPIs are today, start thinking about how you're tracking those KPIs today. And that's critically important. A lot of times companies get to the public market, and they haven't really thought about what narrative they wanna tell one, two, three quarters down the road. So I think that's particularly important. The other thing that we always focus on with companies is, make sure you can predict your business. The public markets reward consistency and predictability, and so, as you think about putting the financial model together, you wanna balance being aggressive with what can you actually deliver? And there is nothing that destroys credibility for a newly public company than missing the market's expectation in the first couple of quarters. So those would be the two things that, as we think about advice to our potential IPO clients, that we really try to hammer home.

David Rawlings: Yep. And then I think the third one you touched on earlier, which investors recognizing that this is a market you can get sized on, but you have to be less sensitive on discounts. Let's get a successful deal done, let's set ourselves up for multi quarters of performance, and then we can continue to monetize into the future.

Keith Canton: Spot on. There is a lot of equity to sell once you become a public company. The IPO is incredible, but it's just one step on the journey to being a public company.

David Rawlings: Well said. Okay, good. Listen, to recap, today we explored the IPO market, we discussed the recent uptick in activity, the changing landscape, and some notable trends across sectors and regions. Big thanks to you, Keith Canton, for joining me. Valuable insights as always. 

Keith Canton: Thanks for having me, David. 

David Rawlings: And thank you to our listeners for tuning into another episode of, What's the Deal? I'm David Rawlings, until next time, thanks for listening.

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