Cautious optimism heading into New Year
Capital markets have been navigating troubled waters in 2023, reflecting broader economic uncertainties, market volatility and geopolitical instability.However, stabilizing inflation and interest rates in the back half of the year offer reasons for cautious optimism going forward.
As 2024 arrives, the persistent inflation of the past year appears to be receding due primarily to the Federal Reserve’s monetary tightening. While a “higher-for-longer” rate environment and deficit concerns could stunt growth, there is a silver lining. The economy posted 5.2% annualized GDP growth in the third quarter — more than double the previous quarter’s.
Although the economy will likely avoid a near-term recession, PwC expects real GDP growth to slow from a projected 2.4% in 2023 down to about 1.4% in 2024. The Fed may need to shift from battling inflation to encouraging growth, albeit at a slower pace than previous cycles — likely ruling out rate cuts in the short term. Its ability to maintain that delicate balance will shape the 2024 outlook.
Will IPO markets finally reopen?
There’s pent-up demand for new investment opportunities and a growing backlog of companies waiting to go public. The market could see a rise in midsize offerings as economic conditions stabilize and valuation expectations continue to reset. Investors have increased focus on strong business models, clear growth trajectories and sustainable practices. Companies also have been strengthening their financials while waiting for a more receptive market.
Growth-oriented companies are examining the tradeoffs between growth and profitability. More mature, diversified businesses are prioritizing cashflow as well as leverage reduction. Given the market uncertainty, companies should carefully plan for alternative scenarios — including the possibility of having to wait until 2025.
IPO activity is likely to be compressed into a window well before the 2024 elections. IPO hopefuls should assume markets may be less accessible the closer it gets to the Election Day, and look at 2025 if they miss that window.
Some recent IPOs have come to market with smaller floats (shares available to purchase) and an increasing number of anchor and cornerstone investors. These trends, often seen during challenging conditions, are forms of de-risking that highlight the difficulty of pulling off deals in a fragile market. Given current market conditions, we expect these trends to continue in 2024.
We also expect the growth of private capital and the evolution of alternative funding mechanisms to continue to reshape the path to public markets. Companies face a more complex journey to IPOs, often opting for later-stage listings after achieving greater scale and stability in the private sector.
Macroeconomic conditions will play a critical role in the health of the 2024 IPO market and the willingness of IPO investors to return to a more normalized level of risk taking. PwC currently assigns a 60% chance of a “soft landing” (our baseline case), a 20% chance of a “hard landing” (pessimistic downside case), and a 20% chance of “no landing” (optimistic upside case). The 2024 IPO market would respond well to either the first or last option, but not the “hard landing.”
What's ahead for 2024
- Stabilizing interest rates could support debt market recovery
- Venture capital trends to watch
Stabilizing interest rates could support debt market recovery
Debt capital market activity should remain resilient in the face of an elevated cost of capital. Refinancings likely will remain front and center as issuers chip away at bonds with near-term maturities and wait for M&A markets to rebound. Leveraged loan issuers, of which private equity portfolio companies comprise a significant portion, have $101 billion and $185 billion of loans maturing in 2025 and 2026, respectively.
In the near term, the expectation of limited interest rate increases will likely provide an improved market tone for deals. In early 2024 investment grade bond volume could marginally increase with a focus on refinancing activity, while leveraged finance (high-yield bonds and leveraged loans) issuance may improve due to pent up demand for M&A activity.
Private equity sponsors are likely to adapt to higher-for-longer interest rates and continue utilizing creative financing solutions to complete deals, including private credit. A focus on noncyclical, resilient sectors such as technology, healthcare, industrials and business services will continue from an origination perspective. Substantial dry powder remains for both buyers and lenders alike, but finding common ground on credit, structure, covenants and pricing will be needed to get transactions over the finish line.
Venture capital trends to watch
As overall venture deal volume, value and fundraising approach multiyear lows in 2023, there is still reason to think this year and 2024 could turn out to be relatively successful “vintage” years.That’s due to several factors, including:
- Lower valuations and the market downturn.
- The influx of talent from the Great Resignation.
- Capital being redeployed from previously hot areas such as crypto and mobility tech.
- Continuing technological innovations in new emerging sectors such as AI.
Potentially positive trends that we’re watching include:
- Strong continued investment in AI and machine learning-related technologies.
- The rise of impact investing (especially climate change and sustainability related technologies).
- Geographic expansion in venture investing.
- Increasing investment diversification into areas like robotics and health tech.
- The possible return of corporate venture investing.
Finally, another interesting development to watch is the advent of AI-driven investing, which automates risk assessment and data analysis.
“All eyes are now on 2024, when we expect more IPO activity given the large backlog of issuers who we see actively focused on public company readiness, and continuing to drive improvements in their business models and metrics. We are cautiously optimistic a sustained re-opening of the IPO market is finally coming.”
2023 in review
In 2023, the stock markets continued to navigate choppy seas, and companies entering the public market faced challenges. The last two years have seen a slowdown in capital markets activity, reflecting broader economic uncertainties, market volatility and geopolitical instability.
- IPOs
- Venture capital
- Debt
IPO: Another quiet year for IPOs
- The IPO market remained relatively inactive in 2023, making the last two years among the lowest volume years ever in the United States. Several high-profile IPOs were brought to market in the back half of the year but, despite successful pricings, most have subsequently traded under their listing prices. This sent a wave of caution through other potential IPO candidates that had been considering entering the market.
- Year-to-date, there have been only 34 traditional IPOs, with pharma and life sciences, consumer markets and technology sectors taking the lead.
- The number of SPAC IPOs and mergers continues to decline to pre-pandemic levels. Funding from both public and private investors has decreased significantly from their peak in 2021, while the redemption rate among existing investors has risen sharply. Year-to-date, there were 28 SPAC IPOs and 79 mergers.
- The S&P 500 has seen a 19% year-to-date increase, while traditional IPOs that debuted this year have seen a 5% average decline. The positive return in the broader stock market is primarily driven by a small subset of tech stocks, attributed largely to advancements in artificial intelligence.
Venture capital: All eyes on AI and machine learning startups
- VC saw $24 billion worth of capital invested in the fourth quarter across the angel and seed, early, and later stages. A total of $154 billion was raised during the full year, which continues a dramatic decline from highs in 2021 as the era of cheap capital subsides.
- AI and machine learning (ML) startups dominated headlines in the VC ecosystem in 2023. The industry raised $53 billion for the year, highlighted by several multibillion dollar financings from large technology incumbents.
- For the most part, IPOs haven’t been an exit option for VC firms. There was a brief period of excitement in 2023, particularly in the second half of the year, with the emergence of a small number of high-profile, VC-backed IPOs. However, the lackluster performance in the public markets of these companies in addition to other headwinds like inflation and geopolitical conflicts has kept most unicorns in the private markets.
- There are still more than 650 unicorns in the country. This number will continue to fluctuate with companies being forced into down rounds and the rapid emergence of new unicorns in the AI/ML industry. We do, however, expect that the shift toward sustainable growth and profitability among many unicorns will be welcomed by investors when the IPO window officially reopens
Debt: Private credit rises as market recovers
- Debt market sentiment improved after Labor Day as issuers found stability and an improved market tone in the Fed’s pause on rate hikes. Many borrowers used this opportunity to refinance outstanding debt and extend maturity profiles — with refinancing leading leveraged finance use of proceeds at 58%.
- Compared to the previous year, 2023 has shown some volume recovery with high-yield bond issuance about 60% higher than 2022 levels.
- In the high-yield bond market, we’ve seen strength in energy sector issuers as high commodity prices and strong cash flow have allowed for deleveraging, resulting in both refinancing and M&A opportunities. The high-yield bond market has also experienced an uptick in secured financing as liens on collateral have generated improved demand in volatile conditions due to increased investor protections.
- Private credit played a meaningful role in the debt capital markets in 2023, particularly in take-private and sponsor-to-sponsor transactions. Moreover, private credit provided refinancing opportunities for issuers that found it difficult to tap syndicated markets. We expect there to be room for both syndicated and private credit solutions going forward, with each market having its own benefits and driving competitive tension where appropriate to ultimately provide better terms for borrowers.
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 11/28/23.
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Mike Bellin
Partner, Consulting Solutions, IPO Services Leader, PwC US
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Doug Chu
Capital Markets Advisory Leader, PwC US
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Rob Cohen
Debt Capital Markets Advisory Leader, PwC US
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