After a Couple Choppy Years, What’s in Store for U.S. ECM?

What’s your assessment of the current market? Do you envision current trends continuing through this year? 

Equity markets are starting off the year with the primary focus on anticipated interest rate cuts and a further slowing of inflation. Given these expectations are now pretty much ‘baked in’ by investors, we could well see factors such as the broader economic outlook, corporate earnings momentum (S&P 500 earnings forecast to grow 9-10% in 2024) and election year concerns taking on added importance with investors. One trend we will be watching closely is whether the equity market performance will become more broad-based beyond a concentration of mega-cap tech names. While the S&P 500 as a whole was up 24% in 2023, it only gained 6% if one excludes the best-performing seven tech stocks.  

And how will the market’s current buoyancy – if it persists - translate to ECM issuance in 2024? 

With the backdrop of a generally positive equity market and a rebound in new issue markets in Q4, we are bullish on ECM activity this year. The IPO backlog continues to build, and a key marker will be the performance of the first crop of transactions. Among already-public companies, we are expecting a strong flow of deals driven by issuers taking advantage of their high stock prices, and also tied to greater M&A activity, with accompanying financing needs. On the convertible front, the surge in activity in Q4 was driven by companies monetizing their high stock volatility and the relative attractiveness to issuers of a convertible offering vs. a high yield offering. If high yield rates come off during 2024, then there could be a slowdown in convertible issuance levels.  

Are there any specific sectors or industries that you believe will be particularly active in the US equity capital markets in the coming months?  

Over the last five years, there have been two sectors that stand out as the most active in the US equity capital markets: technology and healthcare. More recently in 2023, in terms of IPOs, tech led on both deal count and proceeds, producing 25 listings; and the healthcare sector was the second most active, with 19 IPOs, driven by 16 biotech transactions. Going forward, I expect to see this trend continue—and the emergence of generative artificial intelligence will only catalyze this trend forward.  

With a soft landing looking more and more probable for the US economy, how do you think this will impact the appetite for IPOs in the US this year?  

After IPO issuance volume dropped to historic lows in 2022, there was a reopening of the IPO market post-summer 2023 laying the groundwork for the next upcycle. The benchmark semiconductor company Arm’s IPO(1) of $4.9 billion ($45.5bn valuation) was viewed as a catalyst for re-opening the IPO market. After mixed initial after-market support for both Arm and other post-summer 2023 IPOs, their recent stock performance has been more robust. For example, Arm’s stock posted five straight days of losses soon after the offering, even dropping below the $51 IPO price, but more recently has traded up 3% in January. Given the recent reopening of the market and the strong anticipated pipeline to come to market in H1 (according to S-1 filings and press articles), coupled with our constructive view on the overall equity market, we are positive on the IPO market and investor appetite for new issues.  

The first two large IPOs of the year were recently priced: healthcare services provider BrightSpring and sports equipment group Amer Sports. Both met with a disappointing response from investors, pricing below the filing range and struggling in the after-market. Additional names being discussed by analysts and financial market commentators are social media platform Reddit and fast fashion retailer Shein. There is a large volume of VC backed Unicorns and PE backed companies that have been waiting for more favorable market conditions to IPO. I would expect many of these companies to consider a 2024 timing for their offering.  

(1) SG Americas was a member of the underwriting syndicate for Arm’s IPO  

Are there specific sectors or trends that have gained or lost popularity for US investors as we head into 2024? 

One theme that has run into some significant headwinds in the market over the past 12 months is ESG which has become a rather contentious topic in capital markets, often making headlines associated with large fund outflows, disappointing returns and greenwashing. Globally, ESG equity funds reported only $17bn in inflows during 2023, the lowest since 2017 and well behind the $300bn in 2021. While European sustainable fund flows remained positive throughout the year, the market was supported by passive flows rather than actively managed sustainable funds. The U.S. market however told a significantly more negative story with net fund outflows recorded each quarter last year. 

Key factors that caused these ESG outflows and may contribute to this trend continuing in 2024 include the selective political reaction, unfavorable high interest rates that have hurt sustainable energy stocks, and more stringent regulatory oversight on how equity funds use and apply the ESG label.  

In the U.S., equity investors have been putting greater importance on ‘financial materiality’ of companies’ ESG strategies and investments. This is leading to a change in how companies are allocating capital to ESG projects with financial returns becoming a critical factor. Clearly, the commitment by almost all companies to have an ESG mission, including goals for reducing their carbon footprint, is not going away. It is just that equity investors want to see how these investments contribute to the bottom line, which can include mitigating identified business risks. 

And SPACs? What happened to SPACs? Any chance of their reemergence this year, or ever? 

A substantial rise in interest rates over the past two years is what happened to SPACs. SPACs were perfect for the near-0% interest rate environment of 2020-2021 because they offered potentially high returns with minimal risk (outside of opportunity cost) for investors who always redeemed their SPAC shares through the “SPAC-Arbitrage Trade”. 

Investors were buying SPAC units (which had a common share and warrant component), returning their common shares when the SPAC found a company to acquire (getting their capital invested back), and keeping the warrants. This “SPAC-Arbitrage Trade” was very popular among the hedge fund community and drove demand for SPAC issues. 

With treasury rates now at 4%, after hitting 5% last year, the opportunity cost for keeping cash in a low-return trust (effectively the offer from a SPAC) for 1-2 years becomes too high. If rates come back down to under 2%, we expect SPACs to make a comeback. 

How do you think advancements in technology, such as artificial intelligence and blockchain, will impact the US equity capital markets? Are there any specific areas within the markets that you believe will be most affected by these technologies? 

Artificial Intelligence is already deeply impacting equity markets, with some of the largest purchasers of NVIDIA’s graphics processing units (commonly used to train AI) being Wall Street trading firms. They have ‘trained’ AI to execute profitable trades and increase efficiency across equity markets globally. 

In terms of macro implications, a key factor will be increased productivity across sectors. AI is essentially a free worker, and it will make all of us more efficient as usage becomes more widespread. This free labor will have a deflationary effect as production costs will trend down over time, with more work will being done by AI and AI-assisted people across industries. 

And Blockchain? 

Blockchain/Distributed ledger technology has a ton of potential, but the technology is still extremely young. Right now, it is essentially a very expensive public database, and it doesn’t have the efficiency to compete with big-tech cloud databases, which are 100 times faster and cheaper. 

The SEC-approved blockchain ETFs in Bitcoin will drive institutional demand towards this cryptocurrency in the near-term, especially as the “halving” approaches in mid-2024. (Halving is when the annual inflation rate for Bitcoin is cut in half). Many large institutional investors have not had a vehicle to gain exposure until now. It will be interesting to see if the SEC approves ETFs for additional cryptos outside of Bitcoin, with Ethereum being the most likely next candidate. We think there is certainly demand, but whether the regulators are interested in allowing more funds access to more currencies is questionable, given many cryptocurrencies have rather dubious applications as of now. 

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