ECM Issuance Volume
By Frank Fu and Mikhail Shilshtut
The first eight months of 2022 have been extremely disappointing in Equity Capital Markets globally, especially compared with record issuance in 2021. As it stands today, in the US, 2022 issuance is on track to be worse than during the Great Financial Crisis (GFC) in 2008/2009 in terms of IPOs and follow-on offerings. Year-to-date issuance through August 25th for IPOs stands at USD$4 billion and at USD$48 billion for registered offerings.
We investigated historical issuance volume and drew a parallel with volumes observed during and after the GFC. Barring a significant deterioration in equity valuations in the coming weeks and months, we believe that the probability of ECM volumes picking up beginning in Q4 2022/Q1 2023 is high.
The IPO issuance volume has been exceptionally low thus far in 2022 (Exhibit 1).
Based on the history since 2007, the only period that resembled the current environment was the 1-year period from 2008 Aug to 2009 July (Exhibit 2). The total issuance during that 12-month period was about USD$3.5 billion, even lower than what we are experiencing at the moment. However, as the market stabilized during the second half of 2009, issuance rebounded sharply and steadily increased through 2014.
The reasons for the IPO drought are twofold:
Significant amount of IPO issuance was pulled forward to 2021 when valuations were lofty
Sharp deterioration of equity valuations in early 2022 reduced appetite for issuance
2021 was a banner year with over $150Bn of IPO issuance. However, it is important to note that the valuation multiples for the 2021 cohort of IPOs are higher than those in the past, accounting for some of the elevated issuance volumes. For the issuance that was accelerated, it will not get replaced and therefore an air bubble is to be expected. Hence, low issuance volumes in early 2022 should not be a surprise to any ECM participants.
Nevertheless, we believe the IPO drought is nearing its end. Primarily, there has been significantly more private market fundraising in the last decade relative to history (Exhibit 3). In turn, private equity firms have been very active in deploying capital in recent years. According to CrunchBase, there are ~1,400 unicorns in existence globally (~700 in the United States alone) as of August 29, 2022, for a combined post-money value of $4.8 trillion, significantly greater than the number of unicorns in 2009.
Furthermore, public listings require a significant amount of due diligence and financial statement preparation prior to a public announcement. Outside of 2008 and 2022, when valuations saw a sharp multiple contraction, management teams often proceeded with the offerings. During 2011 when the market was flat, but with significant volatility, IPO issuance volume was largely unaffected. As the market recovers from the June 2022 trough, we are now seeing some high-profile companies resuming preparatory work for their IPOs. As such, we believe the probability of resumed issuance in and around Q4 2022/Q1 2023 is high assuming the market does not drop significantly from the current level.
Similar to IPOs, registered offerings have also seen particularly low volume this year (Exhibit 4).
Interestingly to note, registered offerings recovered more quickly during the GFC than IPOs (Exhibit 5). In fact, volume often spikes shortly after the markets stabilize as corporates tend to rush to shore up their balance sheets after times of crisis. We saw this in 2009 and 2020/2021 as both were record issuance periods for registered offerings. Otherwise, the registered deal volume has been relatively stable over the last 15 years. This is because registered offering volumes are generally less price sensitive than IPOs, outside of sudden drawdowns in the market. Corporates raise equity capital during both good and bad times, e.g., shoring up their balance sheet or executing acquisitions. Also, private equity funds need to liquidate holdings as fund lives end.
Also, like IPOs, the low registered deal volume is to some extent due to the accelerated offerings last year when valuations were elevated. As valuations fell in 2022, there was less urgency for corporates or funds to raise capital at significantly lower valuations. The market was also not in distress (unlike May and June of 2020) that would force corporates to fortify their balance sheets (Exhibit 6).
Given the historically consistent volume coupled with the recent activity of registered and unregistered offerings observed in August, we believe that the probability that registered deal volume will resume to normal volume levels beginning in Q4 is high. This could lead into a re-opening of IPO issuance in late 2022/early 2023.
 For all IPO issuance data, we excluded issuance with less than $100MM. Small IPOs are often friends and family deals. They are not representative of the general ECM.
 Chart from McKinsey & Company report “McKinsey’s Private Markets Annual Review” dated March 24, 2022.