No Match Found
Following a decade-long bull market, initial public offerings have slowed to a crawl in the current environment of higher inflation, higher interest rates and sustained economic uncertainty. Prospective IPO candidates are assessing short-term and long-term strategic goals to determine the potential impact of market conditions on capital access. Against this backdrop, companies should consider shoring up balance sheets during open market windows and preparing for potential waves of further volatility.
Companies that had planned on pursuing the public equity markets may need to explore the debt capital markets until the IPO market thaws. But the debt capital markets also worked through a challenging period in the back half of 2022 as economic conditions stymied issuance. In the opening months of 2023 we are seeing a much warmer market tone marked by more constructive issuer and investor sentiment. Many issuers have taken advantage of this opportunistic window to take action on refinancing existing debt and pushing out maturities. While we are cautiously optimistic in our view of the debt markets for 2023, unexpected economic data or further geopolitical unrest can quickly erase any positive ground gained.
While the capital markets have cooled, it is prudent for businesses to take this opportunity to assess whether debt financing can serve as an appropriate funding alternative to achieve their strategic goals.
Until the equity capital markets return, management teams should assess the readiness of their organization to raise capital from both a qualitative and quantitative standpoint. Just like preparing for an IPO, debt financings for first-time issuers require careful planning and focused resources.
Liquidity is a central pillar to establishing a flexible capital structure and simultaneously preparing for any rainy day unforeseen economic conditions might generate. A first step in understanding how a company compares to its peers from a liquidity standpoint is to perform a benchmarking analysis. Additionally, understanding the minimum cash balance needed to run your business, along with detailed cash forecasting, will help guide optimal liquidity levels.
Companies can look to augment their liquidity beyond cash reserves by establishing a cash flow or asset-based revolving credit facility. For businesses with limited cash flow, an analysis of current assets such as receivables or inventory, hard assets like equipment, or even intangible assets such as IP can potentially provide sufficient collateral to raise working capital. Establishing liquidity facilities may require commitments from both commercial/investment banks or non-traditional lenders, so building and maintaining these relationships will be key.
Private credit dominated the financing landscape in the second half of 2022 as conventional bank-led leveraged loan and high-yield bond activity slowed. We expect private credit providers to remain active in 2023. With lenders sitting on a significant amount of dry powder, borrowers can utilize competitive tension amongst capital providers to negotiate more favorable terms. Private credit offers several potential benefits, including speed and certainty to close, deal-term discretion and the ability to work with a limited number of lenders.
For businesses that had previously built forecasts and strategies around a near-term IPO, private credit can provide an efficient means to extend the runway, bridge to an equity offering or simply provide enhanced liquidity. Private credit providers are comfortable working with growing companies who are working towards profitability. These lenders have the ability to provide unconventional financing outside of the traditional syndicated markets. They can provide financing based on metrics such as recurring revenue as opposed to traditional asset based or cash flow lending.
Equity and debt markets investor sentiment is typically supportive of debt raising as long as it doesn’t weigh your company down with a significant interest burden. After all, equity investors want cash flow to be used for growth. Using debt as a source of liquidity, however, can avoid potential equity dilution, and can be a relatively cheaper form of capital based on market conditions. Regardless, if debt comprises too much of your capital stack, investors may view your capital structure as riskier, increasing the cost of future equity raises. In recent years, IPO investors were less critical of claims surrounding high-growth businesses in expanding markets, particularly technology and biotech companies. That trend reversed in 2022 with investor sentiment returning to fundamentals with more conservative assumptions.
We’ve entered into a new economic environment that many have not seen in their professional careers, or for more experienced leaders, have not seen in decades. Cash runway extension and burn rate reduction are critical, especially for high-growth, VC-backed businesses. Financial sponsors may want to hold assets longer than initially anticipated, requiring comprehensive recapitalizations of portfolio companies. Raising a new round of financing will likely present challenges, including downward pressure on valuations and risk-averse investors. But it’s never too early to prepare for an IPO — or for a credit issuance to provide sufficient liquidity until a public equity offering is possible.