“The private market reacts more slowly than the stock market”
Barclays found that, on average, the stock price of companies that staged an IPO on Wall Street last year fell 28%, while the average stock traded on the S&P 500 Index rose 16% (between January 2021 and the end of January 2022). Barclays Israel Country Director Ilan Paz said: “In capital market terms, an IPO is the riskiest asset class investment option that institutional investors can make in the public market. They can invest in veteran bonds and companies or they can take a gamble and invest in new companies that have gone public.
“When the market is geared towards growth at all costs and the appetite for risk is high, many flock to the IPO investment options which are by definition the most dangerous. When there is rotation and As the focus shifts from growth stocks to value stocks, the IPO investment option suffers more than long-established companies.”
Does this mean we will see fewer IPOs and more modest multiples than in 2021?
“Both. But I think it’s important to consider the benchmark. If we look at the first half of 202, that was the peak in valuations and multiples that we had never seen before. But that’s not a fair way to look at it because even if the number of offers came back to the average of the last few years, it would be a drop compared to 2021.”
Is it fairer to look at 2019, before Covid?
“Yes although there are all sorts of cases in different sectors but overall at valuations similar to pre-Covid valuations. They weren’t cheap but not like early 2021. From a point from a broader view, in time they are similar, if not more than two or three years ago.”
Has market volatility and falling tech stocks reduced investors’ appetite for participating in IPOs?
“I don’t think defining it as loss of appetite is fair but pricing will certainly suffer. Good companies will manage to lead IPOs but not at early 2021 valuations. We will grow and profits will come later” will have more trouble. Some will succeed in convincing investors and others will not. So there will be fewer IPOs but it’s not very fair to compare.
“Interest is growing in the ESG sector”
Are there sectors more conducive to IPOs today?
“There is a lot of interest in ESG sectors. Companies in alternative energy, electric vehicles and all things that have that kind of angle are relatively more interesting for IPO investors than in the past. The view is not only about money and financial data, but also how it helps the world to move forward, and therefore the interest in these companies is higher, relatively speaking, than it was in the pass.”
What about SPACS? There are many SPACs with money they have raised that need to find a company to merge with or else they will be forced to return the money to investors.
“It will be increasingly difficult. The money that SPAC has raised comes with a very big ‘if’. Anyone who invests in a SPAC must accept the investment at the valuation at which it is made. If the SPAC manages to a deal with a company at a valuation that SPAC investors don’t agree with, the SPAC money is moot because investors can redeem their investment In my view, there will be many SPACs that will fail to find companies to merge with at a valuation investors will feel comfortable with and will have to return the money.
What do you expect from the already signed SPAC mergers? Will we see further declines in valuations?
“I reckon we’ll see a bit but eventually most of the deals that have been signed will be done. There’s enough interest and enough money to back that up and there are valuations that have already been agreed. There It is therefore possible that there will be some erosion of certain valuations, in order to adjust them to the market, but the chances of realization are higher than for those who are still looking for a deal.
If there is a drop in the number of IPOs and SPAC mergers, does that mean there will be an increase in mergers and acquisitions?
“It’s a more complex question. People tend to think that if a company has raised a lot of money and is sitting on a pile of cash, then we’ll see more mergers and acquisitions. The problem is that a merger and acquisition is also a psychological issue and when the valuation of the company to be acquired drops, there is less of a tendency to spend the money quickly.
“At the same time, companies targeted for acquisition saw different valuations six months ago and a year ago and they will not be in a rush to be sold at today’s price. What is usually seen after a period of very market volatility is certainly a slowdown in M&As and then slowly there is an adjustment to the new situation.So to the question of whether there will be more M&As in absolute terms in 2022 that in 2021 my answer is no but if there will be more mergers and acquisitions than IPOs I think the decline in IPOs will be greater so that relatively speaking, the answer is yes.”
“The private market reacts more slowly
An interesting phenomenon highlighted by Barclays is the gap created between the private market and the public market. Investments in the private market remained strong throughout 2021, even when the listed market began to “creak”, the number of venture capital fund investments of more than $100 million surged.
Valuations and multiples of private companies have remained high. How do you explain this dissonance?
“The stock market reacts very quickly and the highs and lows can happen within hours and days, while the private market reacts much slower,” Paz said.
“Even the stock market rallies in 2020-21 were faster and the private market took longer but it went up and I expect the same in the opposite direction so the dissonance is fleeting.In private finance, agreeing to a down cycle (raising funds at a lower valuation than the previous cycle) is not something that happens often and only happens when the company spent all his money.
“Private funds, especially the big ones that invest in pre-IPO rounds, invest the money relative to the public market. They invest in companies that they believe will go public in two to three years. and they do analysis to look at what the market capitalization of the company will be in the future, they want to get back two to three times what they put in and they get the valuation from that.
“But how do you decide what the stock market valuation will be in two to three years? You take today’s multiples, so if the benchmark is the stock price, and it’s 30% at 50% lower, so it will also be the case in the private market, which cannot be disconnected.”
“The valuation in Tel Aviv is a benchmark for Wall Street”
Several companies listed on the Tel Aviv Stock Exchange (TASE) recently announced their intention to list on Wall Street. Some of them (Nayax and SaverOne) have even filed a case with the United States Securities and Exchange Commission (SEC). Without relating to any particular company, commented Paz. “That’s always been the case if a company was of the size and valuation attractive enough for the Nasdaq, then why not, and if in the early stages it has an offer in Tel Aviv. I think there has companies that have grown and want to move from TASE to Nasdaq.”
In such cases, is the valuation of these companies in Tel Aviv a marker of the valuation they may receive on Wall Street?
“We grapple with this question every time such a company comes to us. I don’t know if I would define it as a marker, but it is a point of reference that cannot be ignored. When private companies come to us, we work according to the multiples of the DCF model and set the valuation ourselves, there we can try to decide but there is a reference and international investors also look at that.
“Companies can’t list on Nasdaq and trade on day one at triple the valuation in Tel Aviv. That just doesn’t happen. You have to have realistic expectations and understand that initially the price will be at roughly that of the TASE and having proven themselves, the valuation can be much higher.”
Published by Globes, Israel business news – en.globes.co.il – on February 8, 2022.
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