The Pipeline: M&A and IPO Insights | S.4 Ep. 2 - Taking a scientific approach to studying IPOs

View Full Transcript

Joe Mantone   00:00:03

Welcome to another episode of the pipeline, an S&P Global Market Intelligence podcast that dives deep into the world of M&A and IPOs. I'm your host, Joe Mantone. And today, we are discussing some new research on IPOs that Chris Fenske has recently put out. Chris is Head of Capital Markets Research in S&P Global Market Intelligence's Primary Markets Group. Chris came to S&P in 2022 via the IHS Markit acquisition that the company did a few years ago. And previously, Chris spent some time on the buy side as a portfolio manager at a New York City hedge fund. Earlier in his career, Chris was a mortgage credit trader and also worked in ABS Research, Credit Suisse. So Chris, thank you for joining us today.

Chris Fenske   00:00:56

Thank you for the invitation, Joe.

Joe Mantone   00:00:59

Chris, before we get into the IPO discussion, I wanted to ask you about your education background. I've gotten to the habit of asking people on this podcast where they went to school and how they got into financial services. And I noticed that you went to Bingamton University. I think you're the second guest on our podcast to have gotten to Bingamton, which is a great school if you can handle the cold weather, of course. But I believe you're the first guest to have a biochemistry degree. So how in the world did you end up in financial services? And how has your degree helped you in your career journey?

Chris Fenske   00:01:33

Okay. So, first of all, a little secret between us. Actually, my true love is science. I've always been a big fan of science my whole life since I was a child. So I actually -- I changed my mind shortly after graduating. So I did spend a summer doing molecular biology research at local medical school. I love the research. I love science and overall. A lot of work in the laboratory, a lot of it's sitting and waiting. So that was part of it, too, where I like a bit faster paced environment. The other part of it, it's a long road to get your PhD and your postdoc to actually make a career doing scientific research. So after spending the summer there, I realized that I had a lot more interest in the financial markets, how they worked. And when I started my first role at Credit Suisse, I learned that I could take a lot of the skills I learned during my biochemistry studies to actually transfer to the financial markets as far as forming hypotheses, proving theories, using mathematics to actually track financial trends and determine the cause and effect. At the end of the day, I still have that love of science, but my real enthusiasm is focusing on financial markets, how they work, the cause and effect of markets' reaction to different events and news and actually trying to understand the underlying reasons for why different equities and bonds react the way they do to different market conditions.

Joe Mantone   00:02:55

Yes. It certainly makes sense that you can transfer some of those research deals that you picked up in school. And you definitely moved into a fast-paced environment covering the capital markets. And the IPO activity in 2025, it did start to pick up a bit, but we have seen some incremental growth in IPOs over the last couple of years. but we are still nowhere near the IPO activity that we were seeing in 2021. But there has been some increased confidence going into the market that we're going to see some more IPOs. That was actually the subject of our last episode of how the IPO market -- IPO window is widening. And your research, I think, which focuses on the IPO performance of IPOs in 2025. I think that's part of the reason why we're seeing some more optimism for IPOs is because of the recent performance, at least that's my opinion. So I'd like to hear what you have to say about that. But before we get into the results and what your thoughts are on the outlook for IPOs, I wanted to ask you about your research. I know you strive to make your IPO performance research a little bit different than what others do out there. So can you walk us through it and how it's different?

Chris Fenske   00:04:07

So about 1.5 years ago, we decided to take a different approach to looking at the IPO markets. Some firms create indices that used to track basically select issues that they track the performance over the course of the year to get some sort of representative idea of how the IPO is performing. I decided to actually switch course and actually treat IPOs as a portfolio. So take every U.S. IPO, pretend that you're buying every share or pro rata portion of a share as the year progresses, and that's your portfolio. And the portfolio of all those IPOs is the portfolio of the overall market. So on that point, if you had bought either all the shares or simply just pro rata of every U.S. IPO last year, the model portfolio would actually return about 10.7% versus the S&P equivalent at the same time of each IPO of only 8.2%. So if you bought the equivalent market value of S&P shares on the day of each IPO's issuance, S&P would have returned -- that A&P portfolio would have returned 8.2% versus the broader IPO index, 10.7%.

Joe Mantone   00:05:11

So how does your research different than from what we saw like in an IPO index?

Chris Fenske   00:05:16

First and foremost, it's inclusive of every single IPO, the smallest IPOs. There's no rolling of the index. So it's basically you're just taking from the first day of the year. As the year progresses, the portfolio is accumulating IPOs and you're treating it as a portfolio and tracking the performance as if it's one portfolio.

Joe Mantone   00:05:36

So in an index, maybe the bigger companies.

Chris Fenske   00:05:38

It's going to be more heavily weighted towards the large companies, which this will be as well, but this enables you to actually zero in on the performance of some of those smaller companies as well. You could take it, you could stratify the data, you could drill into the details of drivers of performance by subsector, the timing of performance, -- there's a lot of things you could do once you have it in this format.

Joe Mantone   00:05:58

It allows you to say what's driving the performance.

Chris Fenske   00:06:01

It could drive the performance, you could take a snapshot of 1 day of the year, see which IPOs perform best up until that point in time. And you could also see things change course. You could see almost rotations from one sector into another from an investor appetite perspective, too.

Joe Mantone   00:06:16

So there's more sort of granularity.

Chris Fenske   00:06:18

A lot of granularity in a lot of ways of creating attribution of the performance.

Joe Mantone   00:06:23

Got you. Makes sense. Okay. So you mentioned that 10.7% increase. Do you think that performance was strong enough to bring investors back who have been on the sidelines for IPOs?

Chris Fenske   00:06:35

It's actually one of the biggest drivers of the decision to bring a company public is how well IPOs have performed over, say, the past 2 or 3 months. Unfortunately, IPO performance during the latter half of last year and even recently has been somewhat underwhelming and not strong enough to open the flood gates just yet. However, it would only take a few larger issues to perform post pricing to start a chain reaction that would encourage others to enter the market.

Joe Mantone   00:07:00

Yes. I definitely want to get into your outlook, but I was curious, looking at your research, we did see a big spike in IPOs in the performance in the middle part of 2025, but it fell back down to earth. And then I think even in November, your portfolio of IPOs was underperforming the S&P 500 equivalent needed sort of a rally in December to surpass the S&P 500. So why did the stock prices jump so high in June and then fall so dramatically after that?

Chris Fenske   00:07:35

So keep in mind, my methodology I'm using is market value weighted. So the market -- current market value of those IPOs at any given point in time. So focusing specifically on June. So June's spectacular performance is actually mainly driven by the combination of AI cloud platform, CoreWeave, which also started off as a crypto platform. They had a $1.5 billion offering that priced in late March. It was up 359% by June 20, and that's very significant. In addition to that, stablecoin platform, Circle Internet Group's $1.1 billion IPO that priced in early June was up as much as 750% by June 23. Now both stocks began to sell off after those late June peaks due to lofty valuations with CoreWeave coming under additional pressure after announcing a $9 billion acquisition of Core Scientific. Similarly, software company, Figma recorded the best first day performance ever for an over $1 billion IPO after increasing 250% on the first trading day. But it had been on a downward trajectory ever since to close out the year at a more modest 13.2% higher.

Joe Mantone   00:08:40

Interesting. So do you think if we didn't see that drop off, we probably would have had much more momentum for the IPO market right now?

Chris Fenske   00:08:48

Yes. So that momentum continued for the second half of the year, it would set the stage really nicely for a very strong start to this year as well.

Joe Mantone   00:08:57

Okay. Talking -- getting back to a little bit about that the granularity you were talking about with your -- looking at the portfolio approach. Do you see much difference in the performance of IPOs just based on the size of the issuance?

Chris Fenske   00:09:10

There are actually some pretty consistent trends that we've seen over the years. So the lower end of deal sizes have performed poorly both this year and last year, with deal sizes less than $50 million, about 18.4% lower in 2025, 17.1% lower in '24. You do need to keep in mind that the less than $50 million deal cohort included 125 deals in 2025 versus only 70 across all the other cohorts. And the small deal sizes do limit institutional participation. On the other end of the spectrum, the greater than $1 billion deals performed well both years with those size deals up 19% in 2025 after being up 30% higher last year. Those larger deals often have more proven business models and can be more patient around the timing of when they decide to go public.

Joe Mantone   00:09:58

Yes, that makes sense with institutional. I'm sure they want the bigger IPOs just because they're more liquid.

Chris Fenske   00:10:04

Exactly. Liquidity is obviously a big factor, and they do have thresholds on deal sizes. They need a certain size deal before they can actually participate.

Joe Mantone   00:10:11

Okay. That makes sense. All right. And then the biggest IPO last year, a medical supply company, Medline, was also the strongest performing IPO on the year. Is that what sort of drove the strong performance in the health care IPO sector overall?

Chris Fenske   00:10:26

So yes, it was a big driver. Medline's $6.3 billion issue was the strongest performing IPO from a value perspective. So the actual amount of value creation was the highest across any IPO last year. But the health care sector would actually still finish 37% higher on the year if you excluded Medline from the index.

Joe Mantone   00:10:44

Wow, what were some reasons for why you think that was the case?

Chris Fenske   00:10:47

There was some strong performance in some biotech companies and some other type of subsectors within health care that did support. And these are decent-sized deals as well that supported the index.

Joe Mantone   00:10:58

Okay. All right. And then information technology, that sector was the second largest gainer. I'm guessing that's AI related.

Chris Fenske   00:11:06

Yes. AI was a major driver for the technology strong performance -- technology sector strong performance, given that CoreWeave did make up 11% of all gains for the entire IPO universe last year. However, software companies, Circle and Figma are not directly AI related and were both significant contributors to the sector's returns.

Joe Mantone   00:11:25

Okay. Now thinking a little bit about the outlook. There's obviously a lot of buzz for AI IPOs definitely coming into the year. Are you buying the hype on that?

Chris Fenske   00:11:35

Okay. There's no question that advances in AI will be transformational. But it's still not clear if and when the major investments required to be competitive in that space turn into revenue and profitability. My other question is, how much room is there for more than one provider? Or will it always be an expensive arms race to create a better model than your competitors?

Joe Mantone   00:11:54

Yes. And you're not the only one who's asking questions about the AI hype. There's obviously some recent volatility. What do you think that means for the IPO market?

Chris Fenske   00:12:06

Yes, there's been some heightened volatility over the past couple of weeks, but it does take significant volatility to shut down the capital markets. And the recent volatility is nowhere near concerning levels just yet and is mainly concentrated around AI disrupting software-related businesses. That being said, it does create some friction in the IPM market and led to a delay in the technology IPO.

Joe Mantone   00:12:26

Okay. I did notice in the first week of February, we saw a number of IPOs price. The activity that we did see in the first week of February, what -- were there any notable deals there?

Chris Fenske   00:12:37

First of all, I wasn't actually really surprised that the recent volatility had almost no impact on the first week of February's flurry of deals with the exception of that one software issue that was delayed. The deal sizes that first week were moderate. They were in like the $150 million to $350 million range with the exception of the $1.5 billion Forge and Power Solutions issue. And none of them are actually from the technology sector. So there was no major friction for any of those particular issues going into the markets that first week.

Joe Mantone   00:13:06

I see. I see. We are seeing some of the volatility impact maybe in the tech space, but not the overall market. Is that sort of the take home from what we're seeing so far?

Chris Fenske   00:13:15

It seems relatively contained right now, and the market is reevaluating some potential overreaction in that space as well, some overreaction from a selling perspective.

Joe Mantone   00:13:24

And then earlier, you said it really takes significant volatility to impact the IPO market overall. So what are you looking at there? Are you looking at the VIX getting to a certain level?

Chris Fenske   00:13:37

VIX is one. I actually look very closely at CDX high-yield spreads. That's the benchmark synthetic high-yield index. It's an actual S&P Dow Jones Indices product. It's extremely liquid, and it's one of the foremost benchmarks of credit. So if that goes -- if that widens out significantly very fast, and it typically does go in line with the VIX, that does show overall market distress bleeding into the credit markets as well. So that's 2 things that I look at very closely. And of course, treasury rates, too. If you see a significant rally in treasuries, a risk-off type movement, it's also an indicator that there's potentially something brewing that could slow things down. And that's not just across equity capital markets too, that could spill over into debt, too.

Joe Mantone   00:14:18

Are there any sort of magic numbers you're looking for, like the VIX getting to a certain height or.

Chris Fenske   00:14:23

So when CDX high yield widens more than 30 basis points on a day, I typically take a look at it and it usually indicates heightened volatility. It doesn't happen very often. Some years, it doesn't happen at all, but that's one. And it's not a hard number at 30 basis points. But in general, when that type of price action happens, you do see heightened volatility and it does slow things down a bit.

Joe Mantone   00:14:46

And then I guess a VIX like in the mid-20s?

Chris Fenske   00:14:49

I'd say when it starts breaking 30s, mid-30s starts getting a little red hot to some extent.

Joe Mantone   00:14:57

Okay. Good to know. All right. About the outlook. Are you expecting any notable IPOs that come to market soon?

Chris Fenske   00:15:04

Okay. None of the major technology IPOs expected in the first half of this year, given reliable access to private markets in the interim. So if they need capital, a lot of these larger -- these hyperscalers and these large AI business models, they actually have access to the private markets if they need it in the short term. The marquee AI companies like OpenAI and Anthropic are expected by some to go public later this year or maybe even early next year. Databricks is another company that could go public at some point this year, but there's been no actual indication of when that could be on the actual timing.

Joe Mantone   00:15:37

Okay. And then aside from the tech AI-related IPOs, any other sectors that you're expecting to see a big year from in 2026?

Chris Fenske   00:15:45

Okay. So SpaceX is the main IPO that everyone is talking about and will likely be the largest IPO of all time, assuming it's expected to raise as much as the $50 billion sometime mid- to late 2026. In addition, payment processing platform Stripe is an often talked about name in the fintech space, but there's no clear timing of when they expect to go public.

Joe Mantone   00:16:08

Yes, I do feel like you've been hearing about Stripe.

Chris Fenske   00:16:10

For quite a while.

Joe Mantone   00:16:13

Yes. Okay. And then what's your outlook for health care IPOs? I think that was a strong performer last year, and we said earlier that the past performance is a good indicator. And I'd also know that biotech stocks are often a big component of the IPO market.

Chris Fenske   00:16:27

So the major shift in U.S. health care policies over the past year continue to create challenges for health care IPOs. For example, last year's biotech IPO activity was limited to only 10 deals compared to over 20 the year before. So we saw a sharp drop-off in biotech IPOs last year. The subdued volume was largely driven by uncertainty around health care policies in the U.S. and concerns around administrative delays in drug approvals. However, many of those concerns are slowly being resolved, which could open the door to an uptick in health care IPOs this year.

Joe Mantone   00:16:57

Yes, that's certainly the uncertainty always causes stress in deal making. efinitely. Yes. And if we do get some of those biotech IPOs, you can scratch your science itch.

Chris Fenske   00:17:08

I actually do look actually at some of the details of some of these -- the drugs that have been created. It's very interesting and the advances made over the past 20-plus years in that space is very exciting.

Joe Mantone   00:17:17

Interesting. Okay. Great. Chris, this has been a fun discussion. So I really appreciate you taking the time with us here today.

Chris Fenske   00:17:25

Thank you again, Joe, for the opportunity to be on your podcast today.

Joe Mantone   00:17:28

Appreciate it. Great. All right. Well, that will do it for this episode of the pipeline podcast. We thank Chris for joining us, and we thank you for listening.