IPO Planning in an Uncertain Market: What You Need to Know

While the 2022 IPO market saw a modest pace early in Q1, global stock declines, Russia’s invasion of Ukraine, the resulting rise in oil prices, inflation, interest rate hikes and more all contributed to a significant IPO slowdown. In a volatile market, what is the best path forward if your company was planning to go public? ICR Capital experts provide their perspectives for preparing for an IPO during uncertain market conditions:

Steve Parish and Lee Stettner

Co-Heads of ICR Capital

Legendary UCLA Men’s Basketball Coach John Wooden famously said, “Failure to prepare is preparing to fail.” Those same words apply to any company considering an IPO.

After a record setting 270 IPOs in 2021, 2022 has been a year of digestion and adjustment.  Public investors are still learning more about the class of 2021 IPOs – their underlying fundamentals and business prospects as the economy faces inflation, rising interest rates, changes in consumer sentiment and nagging supply chain issues.

The volatile market conditions we have seen since the end of last year delayed many companies’ plans to launch IPOs. If you are considering an IPO in 2023, the big question is: When should you start IPO planning, and what should be your playbook for a successful transaction?

At a high level, it would be prudent for companies that are targeting IPOs over the next 12 months to begin preparing now. An IPO process is time consuming and windows open and close quickly so being ready provides necessary optionality.

While it is clear that many companies are grappling with macro headwinds, management teams must also focus on specific needs for capital and which markets can best meet those needs — whether the IPO market or alternate sources, such as a private round.

What are the signs of improving market conditions and the re-opening of the IPO market? A return of issuance activity will likely be led by lower market volatility and improved investor risk sentiment resulting in increased secondary issuance activity i.e., follow-ons for existing public companies and the convertible debt markets. As this secondary issuance increases, investors will look for new investment opportunities in new public companies and the IPO market will reopen.

How will you know if your company is ready for an IPO? As in other market cycles, we believe that investors will look to established companies that have sustainable competitive advantage and growth prospects.  Based on prior cycles, we believe that investors will seek companies that have the following fundamentals:

• Meaningful scale and a durable business model
• A historical and future growth profile that is compelling for the company on its own and in comparison to its peer group
• Predictable business model and ability to articulate drivers of future performance to the Street
• A clear path to profitability (if not currently profitable)
• Proven and capable management team that has actively engaged with investors through conferences and non-deal roadshows
• Reasonable leverage
• Strong governance structure and FP&A organization

Preparation is the key! The broader market backdrop, volatility levels and overall investor sentiment can shift extremely quickly during a recovery.

Lindsay Hyde

Managing Director

Companies that use this moment to continue to prepare for their IPO process even in uncertain times will be ahead of the game. Regardless of the market, we usually find ourselves short on time. Leveraging this moment and allowing more time to better prepare for an IPO in the future will likely pay dividends. Many of these workstreams – such as mock earnings, practicing closing quarter-end books, reviewing corporate governance and internal controls, attending conferences and conducting non-deal roadshows – are valuable in their own right outside of the IPO process.

Jeff Bernstein

Managing Director

The overall IPO process is time consuming with the pre-IPO process taking a couple months and the IPO process taking 6-9 months, depending upon what may be discovered in the audit, due diligence or SEC review processes. Market conditions are unpredictable and can change quite rapidly. If the IPO window opens up unexpectedly, your company needs to be ready to go and move opportunistically. High quality companies can go public in most types of markets; it is just a matter of finding a valuation that investors will buy into.

Michael Goldberg

Managing Director

Despite these unpredictable market conditions, companies should absolutely continue to prepare for their IPO. It takes months to get ready for an IPO, so if you can complete the process confidentially and be ready to go, you will be prepared to complete your IPO once the window is open again.

Regardless of the market, if you’re headed toward an IPO, it’s critical to have the right team on your side. At ICR Capital, we work with clients throughout the entire IPO process — in any market conditions. To learn more about what it takes to complete a successful IPO, please reach out.