After a record-breaking 2021, the global IPO market suffered a significant slowdown in 2022 due to a vast increase in market volatility. We sat down with Liquid Stock’s Founding Partner, Greg Martin, to get his thoughts on what the 2023 IPO market is shaping up to look like. We discussed what he believes it will take for the IPO window to open, what types of companies he expects will be next to go public, and why you may want to utilize a liquidity solutions provider before going public.
This year has brought a lot of instability to the markets. Do you have any market predictions for 2023?
I think we will have a difficult Q1 on the stock markets, with the S&P trending downward and hitting bottom sometime in March/April 2023, coinciding with a peak Fed Rate. I wouldn’t be surprised to see a 15% decline in the S&P 500 from where we are today (~3900) to ~3300.
I expect that Fed rate hikes will continue until mid-Q2 and will hit their peak at around a 5.25% Fed rate. I expect we will see a more rapidly declining (but still high) inflation rate at that point, but an emerging recession, which will cause the Fed to stop raising rates. I expect we may see the Fed start to lower rates by the end of the year in order to stimulate the economy again, and reduce the recession. We may see a return to equities during this period of rate stabilization, but the markets will be choppy as they react to declining earnings from the recessionary effects of the economy.
When do you anticipate the IPO market fully reopening? What will the market need to look like for this to happen?
I’m predicting the IPO market will reopen in Q3, with some of the bigger IPOs happening in Q4 when the market should be more stabilized. This will all be driven by stability in interest rates. It will be good for equity markets in general, but it should also reopen the IPO market. This will also depend on how much the recessionary forces impact the overall economy and provide a drag on corporate earnings. If the recession, which I expect to happen in 2023, goes deeper than expected, we could have a longer cycle of downward pressure in the stock market and a further delay of the IPO market. Right now, I’m not expecting a deeper recession.
Are there any other factors that you believe will impact how aggressively the IPO market reopens?
Yes, there are exogenous events that could derail the time frame. Looking at what we can see today, the war in Ukraine, the European recession, the European energy crisis and its impact on the global economy, and the depth of our own recession here, will all be significant factors in the equity markets. We are a globally connected market, so we are sensitive to all of these world events. All of these factors will impact how aggressively the IPO market reopens, but based on what we’re seeing now, I believe by Q3, we will start to see a more normal flow of IPOs.
What types of companies do you predict will be the next to go public?
I believe the first companies to go public will come from a pared-down list of the backlog of companies that have already filed S1s. The bar will be raised for the quality of companies that can go public, so I expect this list to be much shorter than it is today. Lead underwriters like Goldman, Morgan Stanley, and JP Morgan will be ensuring the market reopens successfully, so I would expect the bar to be fairly high. The market will be looking for mature business models, significant scale, better unit economics, higher revenue predictability, and more overall profitability.
I don’t think the focus will be so much on pure growth, as it previously was, but on sustainable, predictable growth and higher profitability. Because interest rates are so much higher now, I believe companies will need to show solid cash flows in a shorter period of time, or else the discount rates will kill their valuation. In my opinion, only companies that can comfortably achieve a minimum market capitalization of $1B under historically normal multiples should consider going public.
What are other options for companies that may not be ready to go public?
Companies that are not ready to go public, but have liquidity needs, will be looking for private market solutions, either via private equity investors or the secondary markets for shareholder liquidity. These markets tightened significantly in 2022, so companies and shareholders may have to seek more creative liquidity solutions.
One big factor that could be a catalyst for companies trying to go public sooner than they should is the 10-year option expiration issue. When companies set up their option plans, they are usually with 10-year plans, with the assumption being that the company will go public by the 10-year mark. But often, a lot of these companies are still private by then and face option and RSU expiration issues, which creates a whole host of employee, tax, accounting, and legal issues which pushes them to go public before they are necessarily ready.
A great solution for this option expiration issue, is to exercise the options before expiration by partnering with a liquidity provider, like Liquid Stock, that offers tailored liquidity solutions that can optimize taxes, reduce risk, and help maximize net worth for option holders. Turning options into shares alleviates the option expiration issue and creates long-term alignment between the company and its employees.
Why is Liquid Stock a great solution for pre-IPO companies and their employees?
For companies that are entering the IPO pipeline or are nearing that 10-year option expiration mark, liquidity alternatives can be a great solution to unlock the value of their employees’ equity. Our experts at Liquid Stock can help structure liquidity solutions that provide employees with capital to access liquidity, exercise options, and optimize their tax position while allowing them to maintain ownership and upside.
As an employee, if the IPO window is opening, you may want to consider exercising your options so that you become a shareholder and start your capital gains clock, increasing the likelihood that future gains will be treated as long-term capital gains, meaning they’ll be taxed more favorably. For example, for a high-income individual, the difference between the applicable ordinary income tax rate and the long-term capital gains rate could be 17%. On a $1M gain, such an individual could save around $170k in taxes by exercising their options early enough to hold the shares for at least a year in order to receive long-term capital gains treatment.
At Liquid Stock, we provide money for option holders to facilitate the exercise of private company stock options, so you can become a shareholder and achieve these tax, portability, and shareholder advantages. Our solution has been tailored to provide maximum “peace of mind” and help option-holders tax-optimize, and we are always available to discuss how we can meet the liquidity needs of option holders and shareholders in private, pre-IPO companies.
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