The Pipeline: M&A and IPO Insights | S.3 Ep. 1 - IPOs Starting To Pick Back Up

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Joe Mantone: 

Coming into 2025, momentum was building for IPOs, but market volatility spiked in early April stemming from concerns about The US's tariff plan. This took some wind out of the IPO sales, but we have started to see volatility calm down and public valuations bounce back. You've also seen some IPOs' price and companies announced that they are looking to go public. Does that mean IPOs are back? I'm Joe Mantone, an editor with S&P Global Market Intelligence. And on this episode of the pipeline podcast, I'll be talking with Richard Truesdell, a partner and global chair of capital markets at the law firm Davis Polk, and we'll be discussing the outlook for IPOs. Richard, thank you for joining me today, and also thank you for being such a good source for me over the years. I started covering investment banks as a reporter in 2008, and I looked back in our archives, and I noticed that I've been reaching out and quoting you since, 2011. And we've certainly seen a lot of cycles since then, haven't we? 

 

Richard Truesdell: 

Thanks for having me on, Joe. I've been doing this 39 years, but who's counting? And, I think the only common element to it all is it is a cyclical business and the cycles come and go. Sooner or later, we're going to peak out and sooner or later, it'll come back up again. So I agree. The one thing history teaches us is it is bound to repeat itself. 

 

Joe Mantone: 

Yes. And that's something that I learned very early on. Like I mentioned earlier, I started in 2008, and that was the middle of a cycle. And I guess we're kind of in one right now. I it seems like, but it does also seem like we're starting to see an increase in IPO activity. What would you say is starting to drive, the recent pickup? 

 

Richard Truesdell: 

So agree, we're definitely starting to see an increase. It was looking better before all of the uncertainty around tariffs and Fed decisions, etc. And also, you know, when we say an increase, it's against a pretty low base. The past few years have been, compared to historical standards, very low. So even though the number of IPOs is up in Q1 over last year, again, it's a low base. And B, you got to be careful how you count because a lot of the IPOs in the first quarter were little $10 million IPOs. So if you look at dollars raised, it's actually basically flat with Q1 of ‘24. But I want to be glass half full type of guy. 

So I definitely do agree it is starting to pick up. Tech, in particular, has seen more activity. But I think a good sign is we're seeing shoots in basically all the different verticals. There's a couple insurance company IPOs. There's been a number of health care IPOs, couple consumer retail, consumer energy. I did Venture Global, which was the largest year to date. So, you know, we are we are seeing it. But as I said, while I was a little more optimistic before the volatility driven by tariffs, etc., you know, that definitely put a damper. 

But we you know, there's been a couple public filings recently, and we're seeing some rebounding. So hopefully, it can steadily build back. 

 

Joe Mantone: 

Have we seen any sort of changes to the structure or terms in some of the recent IPOs? 

 

Richard Truesdell: 

So I guess I would say, you know, whenever markets are choppy, the banks tend to be careful to bring to market first those companies that are reasonable/conservative on valuation. So I don't know if you call that a term, but clearly, the companies they bring out first to build that positive momentum are those willing to accept a conservative valuation. And so we've been seeing that. If you look at eToro, for example, you know, it came at a much lower multiple than Robinhood, its closest comp, and then immediately popped. We're also seeing more deals with cornerstone investors, either publicly disclosed or not publicly disclosed, trying to derisk the IPO by building a lot of the book in advance. And then the last thing I'd say is SPACs are back. You know, SPACs had, sort of gotten a bad name. Their volume had dropped way off. 

But we had 20 SPACs in Q1 compared to only six in last year. So we're seeing more SPAC IPOs as well. 

Joe Mantone  

And when you say cornerstone investors, so that's just investors who are who are committing? 

 

Richard Truesdell  

Yeah. So if you if you go back a ways, it really started in the biotech sector that people would test the waters in advance of an IPO and have basically built out a lot of their book before they did their first public filing. It then spread to other sectors. And today, it's very common for everyone to test the waters. But a cornerstone investor is more than just a, you know, small indication of interest. A cornerstone investor tends to imply it's a large order that's been put in oftentimes by a smart money, you know, to lend some credence that, ‘Oh, here's somebody who's kick the tires, who's smart and sort of encourage other people to get comfortable with it.’ And so the distinction would be the size of the order and that it's often publicly disclosed on the cover that, you know, X Y Z fund known for its success in this in this vertical, etc., has committed to invest $50 million, you know, pick your number towards the IPO. 

 

Joe Mantone 

Yeah. Interesting point. And then on SPACs, I mean, obviously, we saw the SPAC IPOs, you know, that they jumped, you know, during COVID. And then it kind of you mentioned there was sort of negative headlines out there about SPACs, and they kind of dropped off. So where are we now with SPACs? I mean, do you think it's at a point where, you know, SPACs have a share of the of the market carved out? 

 

Richard Truesdell  

Yeah. So I distinguish between a SPAC IPO versus a company going public through a merger with a SPAC. The merger activity was actually still very low in Q1. And a lot of these SPACs that were launched during COVID are reaching the end of their life where they either have to find a deal or give the money back. So the m and a activity still is, pretty weak. But, you know, as I said at the beginning or as you said at the beginning, this is a cyclical business. And I think we're seeing the upcycle of the SPAC IPO, the beginning of the SPAC process gaining more traction again and more investors willing. You know, I think people were worried in a higher interest rate environment or people willing to invest in a SPAC IPO. 

When interest rates are, you know, next to zero, investing your money and maybe getting it back, you know, isn't nearly as unattractive a possibility or, you know, having a right to get it back as in a high interest in for rate environment where you're missing out on the interest. So part of it was interest rates, part of it was unsuccessful SPAC offerings, etc. But we're definitely seeing a pickup in the SPAC IPO piece. The question is whether they can then successfully carry through and find targets and complete acquisitions. 

Joe Mantone  

Yeah. It's a good point about low interest rates and SPACs. But, you know, and you might also we talked about a little bit about already how, you know, IPOs were slow in recent years overall. So just based on that, you know, I'm sure there's, is there a lot of pent up demand? 

 

Richard Truesdell  

So there's plenty of pent up demand on the supply side. You know, my pipeline of companies ready to go public, you know, I got a whole bunch sitting at the SEC. We've cleared all our comments. We're just waiting for a receptive market. Others, you know, winding their way along. There's new RFPs going out every day, people working up. I think there's plenty of demand on the supply side. It's the demand side is the problem. 

 

Getting investors to be willing to step up to the plate. And given, you know, past performance of IPO classes not being as positive as one would have liked, given volatility in the market, etc. You know, we're definitely slow on the demand side. But again, I think, you know, as the market picks up, no fund manager was ever fired for doing what all the other fund managers did. So there tends to be a little bit of a sounds pejorative, but a lemming mentality. And so when everyone is wary of IPOs, everyone is wary of IPOs. And then as people do one or two and they trade well and then they do another couple, it's like a snowball. It slowly builds. 

So what we need is that demand side to slowly build because, again, I think there's plenty on the supply side, but we need to hopefully get the demand side to catch up. 

Joe Mantone  

How long will it take? 

Richard Truesdell  

So that's all I think a function of volatility in the markets, which is in part, you know, and at the moment created by uncertainty on policy. You know, whether that's tariff policy, whether that's Fed policy. I think we need a period of stability in the markets that then and number of deals, you know, being priced conservatively, trading up. So that when you look at the returns of the IPO class compared to the broader equity market, it's at least as good if not better as opposed to for the past couple years, it's been significantly worse. 

Joe Mantone 

If we get some of that demand back from investors, I mean, is it possible that we could see, you know, IPOs even pick up during the summer months? I know IPOs typically slow down, during the summer, but is there a chance that maybe this year might be different? 

Richard Truesdell  

Yeah. I think I so I again, I think the key is less the summer is stability in the market. You know? Post COVID, all roadshows or the bulk of roadshows are all done by Zoom. You know, pre COVID, everything was done in person. The company would fly around and go to Boston today and Chicago tomorrow and New York the next day. And that interfered with, you know, the hedge fund managers and long investors who were out in the Hamptons. Now that it's Zoom, people are more willing to engage in roadshows during the summer. They can be at their weekend house and pop in and do a quick Zoom call, etc. 

So investors are more available, and we've seen more activity during the summer months. So I think the main indication of whether or not we will see the pickup in, you know, June and July is really going to be more about stability in the markets, conservatively placed price deals trading well. There's clearly the ability to do stuff, you know, well into August as opposed to, you know, pre COVID when everything was done in person and August was kind of a dead month. You know, generally, the bankers are talking about, you know, you're good up until at least the last two weeks, maybe even the last week, if the market is there. 

 

Joe Mantone  

So thinking about investor demand, you know, what kind of company profile would you say would get the most support right now? I mean, you know, would investors back an IPO of a company that has high revenue growth but not much in the way of earnings? Or are investors kind of looking more for a company that has a track record of established earnings? 

 

Richard Truesdell  

Yes. So it's an IPO market has never focused that much on earnings as opposed to positive cash flow. You know, the differentiator has been more sort of, is this a development stage pre revenue company? Like, I did the metagenome IPO last year, which was the first preclinical biotech IPO in a while, and it didn't, unfortunately, trade that well. And then there were no more preclinical IPOs for a significant number of months after that. So part of it is just which IPOs have performed well recently, and then investors are going to be open to that type of IPO. And by that type, I mean, more industry, you know, FinTech. There's been a couple successful fintech deals even though CoreWeave traded down. Initially, it's traded up. 

EToro's traded up, etc. And so spaces that have done well are likely candidates for other people in that space. You know, a couple insurance company deals traded well. So I think it's more driven by which sectors have done deals and traded well. I do think in a risk off environment, which people tend to be in when the markets are volatile, they're going to want positive cash flows. But I don't think they're going to be as wedded to whether, you know, most investors, frankly, don't focus that much on GAAP earnings as opposed to, you know, looking at EBITDA and other non-GAAP measures. And I think in this environment, you know, if you're something, quote unquote, sexy like AI, you don't even need to be EBITDA positive, but they're going to want cash flows. They're going to not want something that's purely theoretical development stage. 

 

Joe Mantone  

And so you mentioned biotech, IPOs. And biotech typically makes up a pretty active portion of the IPO market. I mean, given the current backdrop, what would you say the outlook is for biotech IPOs? 

 

Richard Truesdell  

So, yeah, as you say, if you look back for the past six, seven, eight years, biotech has been the largest sector of the IPO market, followed by tech. These days, in part because a lot of those biotech companies or most of those biotech companies that that went public were pre-revenue, And therefore, you know, in a risk off environment, more difficult. But B, the bigger issue, I think, is just the whole regulatory uncertainty. With the current administration, what's going to be the impact on, you know, all these companies going public are development stage, early clinical trials. But when they ultimately, you know, the payoff is when they ultimately get to commercialize a product. And what's going to be the status of drug prices when that time comes? What's going to be the regulatory status, etc.? So I think, unfortunately, since, you know, frankly, my favorite type of IPOs are biotech IPOs. I like to feel that, probably unjustly feel, but feel that I'm helping contribute in a small way to helping people discover cures, etc. I think there's a significant damper on them at the moment given all of this regulatory uncertainty volatility. 

So I think there'll be some, but it's going to be, you know, those that are more advanced and those that are, you know, the stronger candidates that are able to complete their IPOs. 

 

Joe Mantone  

Yeah. That's interesting. You mentioned regulation, you know, because we have seen or heard some dialogue out of the SEC that they're trying to, you know, help facilitate I IPOs. Have we seen any action out of the SEC that kind of makes, the IPO markets, more attractive? 

 

Richard Truesdell 

So I guess two things. One, you know, chairman Atkins only has been in there a couple weeks, so hasn't had much of a chance. But even before him, the interim chair also had made similar comments. I it's one area in particular, I'd say there's been a complete turnaround, which is digital assets, crypto, etc., where the prior administration basically had a roadblock and would comment you to death and wasn't going to let anybody go public. There's clearly a night and day transformation that, you know, they're going to be treated like other companies and get appropriate comments, etc. But there's not going to be a roadblock. So in that one area, I can say it's night and day a change. In other areas, we haven't seen a lot of change yet. 

 

Richard Truesdell   

And candidly, typically, you know, if you go back again in my 39 years, you go back between Democratic administrations, Republican administrations, etc. The people doing the work at the SEC are mostly lifelong staffers. And so while there can be some high level policy setting based on the current composition of the commission, as a practical matter on a day-to-day basis, it doesn't change that much. And clearly for crypto, there was a message from on high before of thou shalt not let them pass. And that was carried out. But, you know, that has been reversed. So it'll be interesting to see what steps, if any, they take to, you know, facilitate the clearly, they have stated both Chairman Atkins and his predecessor that increasing the volume of IPO is making it more user friendly, etc., is a is a key priority. But it'll be interesting to see, you know, what paths they choose and to what extent they can actually implement that through the staff that, you know, tends to have a way of doing things and, you know, keep doing things. 

 

Joe Mantone  

Right. But it also kind of sounds like the drivers in the IPO market from a deregulation perspective are more about regulation toward a specific industry as opposed to regulation that sort of, quote, unquote, greases the wheels? 

 

Richard Truesdell   

So there are, I guess, two things. You know, I there are changes if you look back and sort of say, you know, what changes again over 39 years. Doing an IPO today is 90% the same as it was doing it 39 years ago. You meet with the company once a week. You draft the prospectus for takes you two months. You file with the SEC. They come back after thirty days with comments. No matter how good a job you did, they're going to come back with comments. 

You respond to them within a few days to a week. They come back after a week or two with half of the comments saying you didn't do a good enough job responding to them, no matter how good a job you did. And that iterates down until you're finally done. They then go you know, the company goes on its rubber chicken road show at the Waldorf, etc. And then now it's Zoom instead of in person. And after a week, with people putting in orders much larger than they want, they get filled at, you know, a lesser percentage. And the company starts trading next day, and half the time it trades up, and half the time it trades down. So it's amazing how little has changed. 

 

Richard Truesdell   

But if I sort of say, you know, what were the biggest changes? They weren't industry specific. They were things like the Jobs Act, where you can test the waters. That has been a pretty dramatic change, where you can test the waters early on in the process before you've wasted a lot of money on lawyers and accountants, etc., and management time preparing for an IPO. So there have been some changes like that. And some of the talk about proposed new changes include things like broadening the category of companies that can take advantage of the Jobs Act, for example, increasing the ability of companies to do other pre-IPO publicity, etc. So there are some changes that people are talking about. It'll be interesting to see which they do, but that aren't industry specific. But, you know, I just drew out crypto as one where that's where we clearly saw a change under the prior administration from past practice, and that's now been reversed to sort of the norm. 

 

Joe Mantone  

Okay. Yeah. And being able to test the waters there, I'm sure that helps. 

 

Richard Truesdell   

Although, ironically so now I lose track of time as to when you could start testing the waters, but say ten years now. In my first 30 years going up to that, I'd had literally less than five IPOs get to the day of pricing and not price. Since you can test the waters where you would think, now we have much more certainty on pricing. Every year, I have at least one, sometimes two IPOs get to the day of pricing and not price. And, you know, it's a little non intuitive to me. I think part of it is people hear what they want to hear. You have the testing the waters meeting and pick your investor and they're like, yeah, that sounds great. Yeah. I'm really interested. And everyone takes away from that. OK. They're in. But when the investors actually call during the road show, they say no. So testing the waters, I’m not trying to discourage testing the waters, but I always tell my clients, you got to take it with a grain of salt. That I've had too many companies where the testing waters meetings all went great. Things looked very positive, and we got to the day of pricing and couldn't price. 

 

Joe Mantone 

If you were SEC chair, what change would you make to sort of help facilitate more IPOs? 

 

Richard Truesdell    

So again, I think the bigger problem for the lack of IPOs is on the demand side as opposed to the supply side. I mean, clearly, there's a lot of very sexy decacorn tech companies that could go public that have chosen not to, in part because of the burdens. But that's not sort of the bulk of the companies not going public. The bulk of the companies not going public are companies that would like to go public but don't think the market is there. So things that would help on the demand side, you know, such as loosening up pre IPO publicity so that people can do more investor education in advance, get their name out there more would be helpful. Broadening up the category of companies, as I said they're looking at, that could get the benefit of some of the jobs act flexibilities would be helpful in terms of, you know, encouraging those companies to do it. There's a bunch of things that sort of aren't IPO related as well. I did, you know, there's various task forces out there out compiling lists of things for the SEC. 

 

Richard Truesdell   

So I'm sure they're being inundated with all sorts of technical changes that could just make life easier for companies, you know. First and foremost is things like not using disclosure documents, prospectuses, etc., as a means for affecting social change, whether that's the climate rule, which the SEC now seems to finally be walking away from. But again, things like that tend to be more on the supply side as the demand side. I've heard people floating ideas of reducing or eliminating the restriction between banking and research. That research, you know, clearly used to play a much greater role in the IPO process after the Internet bubble and, research settlement. Research is now walled off and frankly plays significantly lesser role than it did. You know, some people posit that that's affecting the demand side of the equation. That, unfortunately, is something that, you know, the SEC can't do by itself. Most of the separation between research and banking came through settlements with attorney generals, etc. So it would require a broader legislative slash regulatory fix to, you know, address that. 

 

Joe Mantone 

You mean research before somebody goes public? 

 

Richard Truesdell 

Yeah. So both research so if you go back to, you know, the old days, research didn't publish before a company went public as they do in Europe. You know, in Europe, pre deal research is the norm. The research analysts start publishing before the IPO. They educate the market before the IPO. They're actively involved in the marketing. In the US, because of liability concerns, research never we never did pre deal research, but they would be much more actively involved in vetting the companies, finding the companies, and marketing the companies. And then with the separation post the Internet bubble of research and banking, again, their role has become much more limited. But there is a thought that, you know, if they were allowed to have a more active role, that could increase demand by increasing interest in IPOs, etc. 

 

Joe Mantone 

Right. So the research analyst could sort of help the bankers. 

 

Richard Truesdell  

Yep. And help educate the market more than they do today. 

 

Joe Mantone 

Okay. Yeah. Those are some, really interesting thoughts, and, I appreciate you taking all this time with us here today. Is there anything else that you wanted to add to wrap up? 

 

Richard Truesdell 

No. Thanks for having me on. And fingers crossed that the snowball keeps rolling down the hill and gets bigger and bigger, and the IPO market, you know, returns to prior years' glory. 

 

Joe Mantone 

I agree. It's always more fun when there's more IPOs. 

 

Richard Truesdell 

Thanks again. 

 

Joe Mantone 

Thank you Richard and that’ll do it for this episode of the Pipeline podcast. Thanks for listening.