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2022 Capital Markets Outlook

All-time highs in a turbulent economy

In 2021, equity and debt markets showed an outstanding recovery from 2020, with the S&P 500 closing at record highs throughout the year. The first half of the year showed a substantial return of investor faith after the passage of the American Rescue Plan Act and an unprecedented first quarter during which 390 IPOs raised $126 billion, partly driven by a wave of special purpose acquisition company (SPAC) IPOs.

A spike in inflation in May 2021 caused the market to drop more than 4% over a three-day period, signaling investor anxiety that persisted all year as inflation ticked higher in October and November. Investors have shown concern over economic recovery in light of the Delta and Omicron variants of COVID-19, as well as the impact of rising costs on corporate earnings and fears that the Fed would respond to inflationary pressure by increasing interest rates and accelerating its tapering program. 

We expect continued GDP growth over the next few quarters and believe capital markets will remain resilient in the near future as the Fed closely manages the recovery and inflation concerns. 

Investors show tempered optimism for the near future

The early part of 2021 saw continued support for a broader recovery via economic stimulus and accommodative policy from the Fed. Early disappointments in macroeconomic indicators have been reversed by notable improvements in consumer confidence and 50-year record low unemployment claims.

Investor pessimism with respect to Federal Open Market Committee (FOMC) interest rate revisions and asset purchasing programs was overshadowed by an overwhelmingly positive earnings season. Through the first three quarters of the year, 85% of the S&P 500 beat their EPS estimates. In addition, a growing number of companies are accessing public markets through IPOs and SPACs aided by a significant influx of first-time retail investor participation. All of these factors have led to the extension of the V-shaped recovery, leading major indices to close at all-time highs, with the S&P 500 returning more than 25% for the year.

US debt markets continued to set records in 2021 with the help of historically favorable yields and a record-setting M&A year, despite potential headwinds such as economic growth concerns and inflationary pressures. Despite concerns about the impact the Omicron variant could have on the economy, the Fed confirmed its recent stance to accelerate its tapering program in response to inflation, which has recently reached its highest level since 1982. Based on strong market reactions to FOMC policy throughout the year, the Fed’s tapering is expected to have a marked effect on asset prices in debt and equity markets. 

IPOs

The US IPO markets set all-time records in both issuance volume and proceeds, with 951 IPOs raising $282 billion in 2021. Although this record-setting year was driven by outsized SPAC issuances, traditional IPOs also contributed by achieving the fifth-highest annual issuances in history.

Major drivers behind the record-breaking year
  • SPACs continue to attack: SPACs raised $145 billion across 613 IPOs, the largest annual number of SPAC IPOs yet. There were 274 SPAC merger announcements — the majority in the tech sector — but there are still nearly 570 SPACs with $134 billion looking for deals within the next couple of years. Combined with private investment in public equity (PIPE) and debt, this could drive about a half trillion dollars worth of M&A activity. SPACs attracted regulatory attention in 2021, with the SEC commenting on its desire to align SPAC disclosures and investor protections with the more traditional IPO process. SPAC merger dynamics in 2021 also included increasingly more difficult PIPE market conditions and dramatically rising redemption rates.
  • Tech IPOs more than doubled: Tech IPOs — led by SaaS/application software and e-commerce — more than doubled compared to 2020, with 119 IPOs raising $68 billion.
  • Investors continue to support the biotech industry: Biotech IPOs continued their momentum, with more than 80 traditional IPOs raising $14 billion, led by companies focused on oncology and rare diseases. Venture capital (VC) dry powder is still pouring into earlier-stage biotech companies, which should continue to build the IPO pipeline.
  • Consumer markets also had a stellar year: Led by consumer-conscious food, beverage and apparel brands, 45 companies — more than tripled the amount in previous years — completed IPOs totaling more than $18 billion in proceeds.
  • Investors go big or go home: There were 26 megadeals that each raised more than $1 billion in 2021, the highest number in a decade.
  • Are direct listings a thing? Investors are still unsure of the power of direct listings and the relative benefits of a financial advisor versus an underwriter and the potential to raise capital. Last year, there were six direct listings in the US and one in the UK. Since April 2018, there have been a total of 13 direct listings.
  • COVID-19: Although the Omicron variant of COVID-19 caused increased uncertainty in global markets in the fourth quarter, capital markets overall showed less volatility in 2021 than in 2020. The market measures risk through the VIX volatility index, which was 33% lower on average for 2021 than for 2020, indicating improved conditions for capital raising.

Venture capital has another record year

  • VC firms had a record year, investing $331 billion in angel, seed, early- and later-stage deals in 2021. More than 70% were later-stage deals as companies are staying private longer given their higher tolerance for higher valuations.
  • The most popular verticals for VC investors in 2021 were artificial intelligence, data analytics, blockchain and healthcare tech.
  • More than half the total VC dollar investments in 2021 were “mega-rounds,” i.e., more than $100 million. This trend of larger, later investments often underlies higher valuations — median company valuations increased more than $200 million — and these more than 700 companies are likely to be active in the IPO and M&A markets. The leading areas of investment were the intersection between advanced software technologies, such as artificial intelligence and machine learning, and SaaS applications, such as fintech, healthtech and workplace automation.
  • About half of 2021’s IPOs were venture-capital backed. The IPO pipeline remains strong: More than 500 VC companies valued at $1 billion or more could be included in either the IPO or M&A pipelines in 2022 and 2023.

2021 returns

  • US equity markets had a very strong year, shrugging off volatility and uncertainty. Stimulus packages, vaccine rollouts and an abundance of cash sitting on the sidelines supported investors.
  • However, IPOs failed to keep up with the positive broader market sentiment and turned a five-year positive return streak into a loss of 9%. Concerns around high IPO valuations, the continued large number of IPOs coming to market and more retail investors’ shorter-term investment horizons all contributed to these losses. The tech IPO sector was hit particularly hard, along with some online consumer plays and biotech IPOs.
  • SPAC mergers overall also failed to produce gains in the aftermarket due to investors' concerns about the price paid for the assets and the fact that some companies didn’t meet earnings and operational metrics.

Debt markets continue to set records

US debt markets enjoyed another record-setting year in 2021. Both the high-yield (HY) bond and leveraged-loan (LL) markets set all-time issuance records and combined to shatter 2017’s leveraged-finance record. The markets were fueled by the government’s fiscal stimulus, historically low interest rates, opportunistic refinancings and a boom in M&A and buyout deals. It was the second straight year the HY bond market set an annual record for proceeds raised. The LL market rebounded from a nine-year low in 2020 to blow out records as investors looked to floating-rate debt and borrowers funded M&A and buyouts.

Highlights from the record-setting debt market

Investment-grade bond issuance

Refinancing activity drove investment-grade (IG) bond issuance.

  • The IG market raised $1.37 trillion in 2021, a 19% decline from 2020’s record-breaking year.
  • Borrowers continued to extend maturities and lock in cheap rates this past year, with refinancing activity being the largest contributor to the market accounting for 30% of issuance.

High-yield bond issuance

M&A and refinancing contributed to a second-straight record-setting year.

  • The US HY bond market saw $465 billion in issuance and blew past 2020’s record year in early November, supported by a strong supply of M&A and buyout deals.
  • Refinancing remained the primary use of proceeds with 63% of all issuance, but M&A and buyout proceeds increased by $53 billion to $108 billion in 2021. 

Leveraged loan issuance

PE dealmaking created leveraged-loan issuance record.

  • The LL market set an annual record with $789 billion in issuance, a 100% increase from 2020.
  • Leveraged buyout (LBO) and M&A activity accounted for more than 50% of the proceeds in the market, aided by pent-up demand for higher-returning investments. The market also saw increased demand for floating-rate debt in the face of inflation, with rising interest rates helping push the market into record territory.

Bond yields

Issuers seized on historically low yields ahead of potential rate hikes.

  • Yields saw a slight uptick in late 2021 but remain near all-time lows, as market participants price in the potential of three rate hikes in 2022 and the trajectory of the Fed’s asset purchase tapering program.

What to watch in 2022

Economic outlook calls for a GDP slowdown but remains resilient

We expect strong household fundamentals and gradually easing supply constraints to further support economic activity through this year. The risks, however, are weighted to the downside. Labor and intermediary input shortages, inflation overshoot and the Omicron variant could continue to weigh on growth in the near term. While we expect GDP growth to remain above trend over the next few quarters, the underlying pace of growth likely will begin to slow by mid-2022 as fiscal stimulus diminishes and some of the pulled-ahead demand fades. Our baseline expectation is for real GDP growth to top 5.5% in 2021, but then moderate to about 4% in 2022.

IPO window remains open for now

We anticipate IPOs could potentially continue their pace of issuance into 2022 as ever-increasing piles of cash on the sidelines, including $134 billion in SPACs, need to be invested. Also, the IPO pipeline is stuffed with private equity and VC-backed companies with significant track records and market presence, which makes them good IPO candidates. However, external pandemic or geopolitical shocks to the economy could pose challenges to investors’ appetites for new listings. With nearly 570 SPACs still looking for deals, it is likely that SPAC issuance will slow down. Despite concerns about new COVID-19 variants, optimism remains high that vaccines and other mitigation strategies can prevent widespread lockdowns, keeping equity markets steady and maintaining the environment many prospective companies seek when going public. 

Debt forecast for 2022 is positive, but will face increased rates

The market will continue to debate the Fed’s actions in 2022 as inflation and the potential for new variants pose greater risks to the economy. The spike in inflation and the question of its longevity continue to add uncertainty around monetary policy. Pending any unexpected action from the Fed, issuers will likely continue to strengthen their balance sheets at historically attractive rates. Additionally, M&A and LBO activities are expected to continue their pace and drive the market forward, as buyers compete for assets and corporates look for synergies and focus on their core operations. 

Capital markets outlook for 2022 remains positive

The broader capital markets enjoyed an excellent 2021 and look strong going into 2022 despite a recent pullback largely resulting from the Omicron variant. Key concerns for continued economic recovery include the effectiveness of current vaccines against new variants, as well as quarantines and other geopolitical factors that are disruptive to economic recovery and supply chains. The market appears to have priced in these concerns, and investor sentiment remains high going into 2022, making US markets poised to remain positive. 

Please note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, and IPOs pricing on OTC Bulletin Board or OTC Pink Sheets are excluded from this narrative. Venture capital data is for US headquartered companies. Data from SEC filings and third-party databases are as of December 31, 2021.

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Mike Bellin

Partner, IPO Services Co-Leader, PwC US

David Ethridge

IPO Services Co-Leader, PwC US

Daniel Klausner

Capital Markets Advisory Leader, PwC US

Derek Thomson

Capital Markets Research Leader, Deals, PwC US

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