Q1 2024 Capital Markets Watch

Rising IPO activity offers hope for capital markets reopening

Optimism among investors propelled US stock markets to reach all-time highs in the first quarter of 2024. The tech sector played a crucial role in helping drive these gains, largely due to the strong performance of a small number of mega-cap equities with exposure to artificial intelligence (AI), with potential for another rally to come from the broadening AI-catch-up trade.

The IPO market is displaying signs of optimism after two very quiet years, marking the highest number of traditional IPOs since the fourth quarter of 2021. There is a strong pipeline of companies filing for IPOs, with additional notable names joining the “shadow backlog” (filing confidentially). Most investors looking at growth companies are prioritizing growth with profitability and sustainable cash flow over the previous “growth at all costs” model. Life sciences and biotech-related companies were the busiest IPO sector in the first quarter. With US elections on the horizon, we anticipate a continued uptick in IPO activity during the second and third quarters of 2024 as IPO hopefuls plan to list ahead of the election cycle.

The US economy ended 2023 on a strong note, and we expect this strength to persist in the first half of 2024. While some of the uncertainty that dominated the outlook last year continues to cloud the near-term economy, there are positive developments. The hard part of the inflation fight appears to be over. A strong labor market continues to underpin consumer demand. The Federal Reserve seems to be on the verge of securing an economic soft landing following the sharpest series of interest rate hikes in decades. While growth in coming quarters may be slower than the 3.3% pace seen in the fourth quarter, it’s still likely to be around the US economy’s long-term trend of 2%.

There are some risks. A softening of the job market could rapidly intensify into a serious economic downturn, weighing on real income in an already challenging environment of high borrowing costs, tight credit conditions and reduced support from pandemic-era savings. The Fed still faces some difficult tradeoffs. Geopolitics and commodity markets are wild cards. And it’s an election year. The recent stubbornness in inflation numbers could create enough caution at the Fed to take a more patient approach. We don’t expect a rate cut before June unless economic activity slows substantially. Even so, there’s limited time for the Fed to interpret and react to incoming economic data to assess a meaningful downward trend in economic growth.

Borrowers continue to navigate uncertainty around when the Fed may begin rate cuts. In 2024, the debt markets have benefited from a positive market tone and the bond markets picked up with issuers receiving favorable rates compared to those seen this time last year. There have been signs of more risk tolerance from investors as banks have become more aggressive, fueling greater M&A financing in the syndicated debt markets and more favorable pricing as Q1 has progressed.

“Q1 2024 is off to a strong start – could 2024 finally see the return of a more normalized IPO market? So far, so good...”

— Doug Chu, Capital Markets Advisory Leader, PwC US

The latest numbers

IPOs off to a strong start

  • The first quarter saw a surge in traditional IPOs, with 14 companies going public, driven primarily by the pharma and life sciences sector with 6 out of the 14 traditional IPOs so far. These first quarter IPOs collectively raised over $6.5 billion, more than triple compared to the same period a year ago.
  • This quarter saw the public debut of two highly anticipated tech IPOs: a renowned unprofitable social media company – the first since 2019, and a datacenter connectivity company, both of which experienced significant gains on their debut, with returns of 48% and 72%, respectively. It is interesting to note that a key element of both of these companies’ growth stories is potential AI-related demand coming from growing AI model training needs for unstructured content as well as datacenter related resources.
  • The momentum for SPAC IPOs, SPAC merger announcements and completions has slowed relative to the prior quarters. The first quarter saw 6 SPAC IPOs, 19 SPAC merger announcements and 20 SPAC merger completions. The SEC’s recent adoption of new rules aimed at enhancing investor protection by requiring additional disclosure and aligning reporting requirements with traditional IPOs will likely continue to impact the volume of these transactions.
  • The S&P 500 is up 9% quarter-to-date, largely due to a select group of companies offering a strong AI value proposition. This quarter’s traditional IPOs are up nearly 19%, outperforming broader indices. This outperformance could be a sign that the IPO markets are reopening, as valuations have normalized and a more balanced equilibrium has developed between buyers and sellers, compared to prior quarters.
  • There is a solid pipeline of companies waiting to go public. Continued positive performance of some of the notable IPOs discussed above will be one key to driving market momentum. We expect the IPO markets to remain robust, given a favorable economic outlook (PwC currently assigns a 90% probability of a soft landing), inflation tracking toward 2%, and anticipated Fed rate cuts in the second quarter.

AI keeps venture capital afloat

  • Venture capital (VC) has invested $29 billion quarter-to-date. Most of it, 60%, went to later stage investments. While there’s been a dramatic decline from the 2020 and 2021 levels, activity is relatively consistent with 2018 and 2019 levels of investment.
  • AI and machine learning (ML) companies remain the darlings of the VC universe as investors look to capture value creation related to this technological shift. These companies have raised $6 billion quarter-to-date.
  • Notably, there have been rising tensions between traditional VCs and corporate investors in AI businesses. Corporates have participated in 53% of the total AI and ML deal value quarter-to-date, down from 70% in 2023. Many of these portfolio companies rely upon their corporate investors for mission critical items like computing power.
  • The pace of unicorn growth continues to be noticeably slower than the peak in 2021 and 2022. We’ve seen 15 unicorns minted quarter-to-date, of which six are AI and ML companies.
  • Looking ahead, the VC market will be focused on exits of VC-backed businesses and the ability to return money to limited partners. So far, 2024 has seen eight VC-backed IPOs and more are ready to enter the public markets.

Markets rebound in anticipation of first rate cut

  • The US debt capital markets raised $736 billion in the first quarter across the investment-grade (IG) bond, high-yield (HY) bond and leveraged loan (LL) markets. This marks a 48% increase over Q1 2023’s level as market indicators like inflation (CPI and PCE) and commentary from the Fed created a more risk-on tone for the market.
  • Opportunistic transactions took center stage to start the year, with refinancing and repricing activity surging due to a lack of new supply. In January the LL market saw $87 billion of repricing activity, a four-year high. January was the HY bond market’s busiest month since November 2021 with $31 billion issued. Additionally, borrowers issued $17 billion quarter-to-date to support dividend recapitalizations, the most since Q4 2021.
  • M&A and LBO activity have seen a resurgence with $48 billion raised in the leveraged finance markets (HY bond and LL) as banks have become more aggressive in underwriting deals. The IG bond market has raised $79 billion for M&A, the most since Q1 2021, highlighted by several jumbo offerings.
  • Borrowers have taken advantage of tighter spreads and investor appetite by refinancing more expensive private credit with cheaper broadly syndicated loans. About $11 billion of private debt has been refinanced in the broadly syndicated markets and some issuers have reported savings of about 300 basis points in interest expense. Regardless of this shift, private credit remains a growing asset class owing to flexible terms like PIK interest and delayed draw components, among other reasons.
  • Looking ahead, the main focus will still be on when the Fed’s first rate cut will come. Until then, we expect issuers to continue to proactively extend maturities and the M&A and buyout markets to remain modestly active.

Note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Data from SEC filings and third-party databases are as of March 25, 2024.

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Mike Bellin

Partner, Consulting Solutions, IPO Services Leader, PwC US

Doug Chu

Capital Markets Advisory Leader, PwC US

Rob Cohen

Debt Capital Markets Advisory Leader, PwC US

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