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Analyst explains ‘2 factors at play’ in IPO freeze

EquityZen Senior Research Analyst Brianne Lynch joins Yahoo Finance Live to discuss the longest U.S. tech IPO drought in 20 years, investors slowing down on investing in private companies, inflation, and the outlook for the IPO market.

Video Transcript

JULIE HYMAN: A lot of the recent IPOs aren't doing too well. As equity markets languish, more and more businesses are shelving their plans to go public, especially in the tech sector. A stark contrast, of course, from the IPO frenzy during the pandemic that launched companies like Roblox and Sentinel One to public markets, but maybe not surprising, given the weak exit values of recent listings.

Joining us to discuss the state of the IPO market is equities and senior research analyst, Brianne Lynch. Brianne, it's good to see you. What EquityZen does, by the way, for folks who are not familiar, is lets people get in on pre-IPO companies, sort of allowing broader access than is typically permitted there.

And Brianne, what kind of-- I'm curious, first of all, what kind of interest you're seeing in those companies, the pre-IPO companies, because if you know maybe your exit, your cashout is going to be pushed out a little bit, is that also affecting private funding? Oh, Brianne, we can't hear you.

BRIANNE LYNCH: Sorry about that.

JULIE HYMAN: There she is.

BRIANNE LYNCH: Absolutely, great to be here. And what you mentioned is exactly the trend that we're seeing in the private markets now. Because these companies aren't going public in the near future, given the volatility, given what's going on in the market, there's two factors at play. One is that shareholders and early employees are looking for liquidity and coming to a platform like ours to receive that type of liquidity.

And then on the flip side, investors who are interested in these companies and realize that the public exit's not going to happen soon are tapping the private markets to invest and are actually able to invest at some attractive discounts and valuations, given what we've seen in the public markets now translate into the private markets.

BRAD SMITH: This also becomes a retention issue for some of the talent, too, especially in labor markets where, for some of these tech companies and private companies, it's extremely tight in making sure that you're maintaining kind of the talent cohort that you've been able to take on and build up the goods or the services that you're bringing to market.

For some of those early employees, it's really equity in the companies that they're also pitched on to. And so for equity as a retention mechanism, you know, how have you also monitored the shake-up there and how this might even kind of change the pathway towards a public offering that a company may even see in the future?

BRIANNE LYNCH: Absolutely. So at EquityZen, we've worked with over 400 late stage private companies on liquidity programs. And we are having more conversations than ever before with these companies, who are realizing, exactly to your point, OK, if we're not going to have a formal exit, we need to do something for these employees who may have options who are expiring or may have other life needs that require liquidity.

And as you'd also mentioned, it's definitely a retention piece. When employees are able to get liquidity, they're able to see the real value of that sweat equity that they've put into these businesses. So it's something that companies are thinking about, they're planning around, and have much more appetite to do than in the past, understanding that the public markets are probably not a place that they'll be in the next 6 to 12 months.

JULIE HYMAN: So I want to pick up on that. So you think that this sort of freeze-- I mean, it's not an actual freeze, but it's almost a freeze. You think that that's going to go on for the next 6 to 12 months?

BRIANNE LYNCH: Yeah, I would say where we are in the IPO market now and seeing the results that companies that did IPO in 2021 saw, those companies are down, on median, 65% versus the NASDAQ, down 27%. If I'm a private company looking at that and looking at the broader market landscape of high inflation, rising rates, geopolitical risks, there's not a lot of appetite to go public, unless I absolutely have to, or I feel confident enough in my financials and in my brand that I think that I'm a must have company that public market investors will invest in.

BRAD SMITH: Is the SPAC as a means to going public, do you believe that to still be a viable option for some companies? Or have we seen this washout really shake the tenor of that mechanism of entering into the public markets?

BRIANNE LYNCH: I'm interested to see. Obviously, we saw a big SPAC frenzy a few years ago. And now some of those SPACs are having trouble finding companies that are attractive targets. And they're having to return capital to their investors. I saw two stories of that earlier today. So I don't think SPACs are going to go away. But I think that the easy money or quicker path line to IPO that SPACs allowed isn't as attractive in today's market.