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IPO market in a ‘wait-and-see period,’ EY Americas IPO leader says

EY Americas IPO Leader Rachel Gerring joins Yahoo Finance Live to discuss the U.S. IPO market, navigating through recessionary fears, inflation, supply chain woes, volatility, and the outlook for IPOs.

Video Transcript

BRIAN SOZZI: Companies are pumping the brakes on public debuts with the number of IPOs in the US plunging by 75% in the first half of this year compared to last year according to new data from EY. Joining us now to break down the latest in the IPO space is EY Americas IPO leader Rachel Gerring. Rachel, good to see you here this morning. Have we reached a bottom yet?

RACHEL GERRING: No, I don't know that we've reached the bottom, but we are certainly in a wait-and-see period. Companies are pausing, taking stock of just what's happening across the broader market, and navigating through the choppy waters of rising interest rates, inflation, and recessionary fears, ongoing geopolitical instability, and supply chain shortages, workforce shortages, high volatility. And then we can't forget the performance of the 2021 IPO class.

That certainly makes it difficult. They're down, the last numbers I saw, more than 45%, trailing the broader market. So that makes it a struggle for new entrants.

- Rachel, in a past life, I remember sitting through way too many of these pitch meetings for companies that were looking to go public, trying to figure out the best opportunity for them to get out the door and into the public markets. But as of right now, if there's anything that these companies are citing in terms of the biggest fears that they have and how much further they may push out their timeline, what are you hearing from them?

RACHEL GERRING: As I mentioned, they're in a wait-and-see, navigating through this. Right now, companies are taking this time to be inward focused, looking and challenging their business, really shoring up key functions in that public company readiness arena, forecasting abilities and so forth, and waiting it out. I think right now investors are focused on both growth and profitability, or at least a clear path to profitability. So I see in the last half of this year and into '23 companies that can convey both growth and profitability as opposed to growth at all costs that we saw in 2021.

JULIE HYMAN: And Rachel, as you mentioned, the performance has been maybe not uniformly terrible, but pretty uniformly terrible of the companies that came public last year. Has the timing of some of those IPOs, do you think it will ultimately actually torpedo their businesses because of their liquidity accessibility, for example? In other words, is the timing of a company's IPO, can it ultimately make or break the business?

RACHEL GERRING: I think there's a lot of opportunities for company to explore access to capital. Certainly, IPOs can be used as a funding mechanism and that's what's going to really dictate when companies ultimately do or don't come to the market based on their funding needs, liquidity, and then overall just objectives that they have. So there's options out there in the market for them, both on the private side and then the public side. And I think companies are carefully just evaluating all of those options they have and then what's the right timing for them.

BRIAN SOZZI: Private companies, Rachel, too, their valuations have been hammered and now, so many of them are laying employees off, just given the uncertainty. When they ultimately do come to market, at some point, what do these companies look like?

RACHEL GERRING: I think right now it's going to launch or what the entrance that we're going to see first, again, are those companies probably more in the defensive sectors, the consumer staples and so forth. And again, both growth and profitability I think are going to be the companies that we see coming to market most earlier, driving that investor focus. And hopefully we continue to see an uptick from there.

- The ways in which companies have gone public, I mean, whether it be the traditional IPO, whether it be a direct listing, whether it be part of a dSPAC process. Specifically on the SPAC side, we've seen so many of those businesses, also those that have made it into the public markets thus far, they've also faltered over the course of this year. Does that put a significant dampener on this potential type of route to go public and is the SPAC, is that dSPAC process, is that kind of diminished or even dead at this point?

RACHEL GERRING: I wouldn't say that it's dead. It's certainly diminished, but we have over 500 active SPACs right now looking for a transactable target. Will all of those deals get done? Probably not.

But certainly, the performance of those that went in 2021 is dampening the market right now. What's also impacting SPACs, unlike traditional IPOs, is the uncertainty around regulation. The proposed rules from the SEC are still there. Both SPAC sponsors, underwriters, and other parties to the transactions are navigating through that and where will that land?

That's also impacting the decrease in SPAC activity that we're seeing right now. And as they navigate through that, I think they're going to adapt and adjust. I don't know that SPACs are going to go away. Are we going to see the same numbers that we saw in 2021? Probably not.

- Do you expect that for some of the exchanges that certainly do rely on their listings revenue, we just saw NASDAQ report today and their revenue did jump 6% to $893 million. But they saw a rise in a different part of the business, kind of outside of some of the listing services that move forward. And so ultimately, for the companies who are paying a lot of these fees, might we be seeing and due for another restructuring even of the fees that they're paying to have their outstanding shares listed?

RACHEL GERRING: Potentially, that's something that certainly can occur, but right now, we're focused on just really helping companies evaluate their path to going public, how they would go public, and really that public company readiness, making sure that they are thinking through and prepared for the demands of being public. We always recommend companies. You've got to operate like a public company before being public. And so we're finding a lot of our clients are taking this time right now, really focused on that.

JULIE HYMAN: Rachel, thanks so much. Rachel Gerring, EY Americas IPO Leader digging into what's been a sluggish IPO market. Appreciate it.