Code View Point: State of the IPO market
This is the first of a regular feature where I will share a few short insights from the financial markets / wider economic developments and assess the implications for philanthropy.
My aim is to keep each article to a maximum of 750 words so that you can read each one in under 5 mins!
I had hoped to start these articles a little sooner but here goes with the first one!
We will often see in the press details on an IPO, statements about the IPO market and rumours swirling around which will be the next private company to tap the public markets. However what significance does this have for prospect researchers and fundraisers? Well it could have a fair few zeros impact!
Lets start with the basics.
An Initial Public Offering (IPO) is where previously privately held shares are sold to the public. This sees the founders / owners give up some or even all of their shares in return for cash. Think of Google, Apple and Microsoft all of whom started in a garage and now are some of the biggest public companies in the world (also making their founders some of the richest people in the world at the same time).
Some owners will retain a stake in the business (there are lots of inventive ways this can be done such as through B share issuance etc - more on that another time!), some will be appointed to senior positions in the business (and get handsome reward packages) and some will leave and often setup a new venture with the wad of cash they have just received!
Ultimately though an IPO sees a private company become a public one with their shares listed on an exchange such as NYSE, LSE, ASX or the NASDQ etc.
The significance is that an IPO is often the primary wealth creation moment for individuals and far exceeds other sources of accumulated income.
When first coming into this sector with PyroTalks I was amazed how little attention was given to private company valuation. An IPO could net owners billions in one go and thus provide an influx of cash that is ripe for a donation
You will see that on Code we have a strong focus on private company valuation to support your identification of potential prospects that have been hard to previously value. Our Smart Valuation tool enables you to value private companies / shareholdings irrespective of the level of information you have. You can use this valuation to prioritise prospects and gain an insight into their potential wealth (albeit capitalised wealth).
A buoyant IPO market is great for founders, positive for financial markets (ie bigger banker bonuses and more listed companies) and provides the realisation of value for business owners (ie shifting their wealth from capitalised to liquid).
Where IPO markets falter business owners have fewer ways to realise value and are unable to exit as easily or with as much money.
Having read a recent FT article, it confirmed my initial thoughts that the IPO market this year has been severely depressed. Some of the pertinent points include:
Wednesday will mark 238 days without a tech IPO worth more than $50mn, surpassing the previous records set in the aftermath of the 2008 financial
Overall US IPO volumes are down 94 per cent year on year, with just $7bn raised so far in 2022 compared with $110bn in the same period last year, according to Dealogic data
This is not good news, but it could show how in the future we will see a flurry of IPOs when the market is firing on all cylinders.
Making an ask after the IPO is too late as the proceeds will already be either physically or notionally allocated. At a recent PyroTalks event Bod Buckley stated that following a London IPO, the founders made a significant charitable contribution - however that was to an organisation where a relationship had been established over several years. Therefore, it is important that relationships are built early and even pre-exit donations are setup (see the links below for further info). When the IPO market is quiet - it presents a good time to build those relationships!!
Practical takeaways
Monitor the IPO market - there more active it is the more wealth will become liquid
Use Code to value private companies of any size or industry - this will help identify and prioritise prospects
Build relationships early
In my next insight, I’ll give you a few examples of how to spot companies prepping for an IPO and how to monitor SEC filings for evidence that a company is prepping for an IPO.
Hope this article (and future ones) provide a few ideas that you can explore. Any questions or comments let me know.
Jon
Key article links
https://www.ft.com/content/90cb4e56-b460-4654-b420-9c470218fd9b
https://www.deedeemendoza.com/blog/2019/8/28/5-truths-of-pre-exit-philanthropy
