Despite a dismal 2023 for IPOs, Rainmaker Securities Managing Director Greg Martin sees a potential "greenlight situation" for a rebound in 2024. He notes positive drivers like a dovish Federal Reserve, falling yields, and economic stabilization are making conditions "quite good" for public debuts.

While risks like geopolitics remain, Martin expects "a major 2024 if these conditions hold up." He notes poor post-IPO performance for 2023 deterred further issuance, but a strong showing by some anticipated offerings could kickstart a "jetstream" next year.

In Martin's view, companies demonstrating "stable, but profitable growth" will attract investors focused on profitability rather than growth alone.

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Video Transcript

JULIE HYMAN: For more on what the IPO market will look like in 2024, we turn to Rainmaker Securities Managing Director Greg Martin. Greg, good to see you as always. So we have these sort of marquee names that could be leading things. We had some marquee names as we've discussed before that were supposed to salvage the market this year. Didn't quite work out that way. So what's going to be key to let us know whether the environment is going to be better in 2024?

GREG MARTIN: Well, thank you for having me. Good to see you again. You know, it's-- right now, we're in a green-light situation. You know, we have a very-- 10-year now below 400 basis points, down over hundreds 100 basis points in the last three months. We have a very positive Fed cycle somewhere between 100 and 150 basis point reduction expected in 2024. We have a pretty stable economy. VIX is near a five year low.

So the conditions are actually quite good. And we have, as you mentioned, a very strong pipeline of companies. And so if these conditions hold up-- and, of course, there's all kinds of geopolitical risks and growth is still fairly tepid, so there's reasons that things might not develop-- I would expect we could have a major 2024 if these conditions hold up. And it'll be interesting to see if some of these companies that will test the market early, like the companies you mentioned, will start to show really strong aftermarket performance.

I mean, one of the reasons we had a slowdown in 20-- at the end of this year is because some of the companies that did go public had kind of relatively mediocre performance. And I'm thinking of like Klaviyo and Cart, Instacart, and Birkenstock. And so I think what we're going to need is a few of these companies to go out and to perform well. And then that could be a real jet stream for 2024.

JOSH LIPTON: And, Greg, do you think next year, are there certain kinds of companies that you would expect to in 2024 get a more positive reception from public market investors? Do you think you've got to show-- in 2024, you have to show a proven business model, a decent bottom line, Greg?

GREG MARTIN: Yes, absolutely. And I think a lot of these companies that frankly have been waiting for a few years now to go public, who maybe previously were more focused on growth, I do think profitability is more in vogue. And I think it's much more important to show better business unit economics, more stable but profitable growth. And so I think our first batch of companies will be and the companies that will succeed and the companies that underwriters are going to want to take public are going to be ones that have that more predictable profitable model.

And so I don't think we're going to see the high flyers necessarily. Although if we do see a nice flow of IPOs, we may get back to the high flyers, which could be some of those companies who won't be profitable but will be growing extremely well. So that'll be interesting as we look to the later parts of the year as to whether some of these high growers can actually access the public markets as well.

JOSH LIPTON: Well, and, Greg, sort of on a related front is going to be the investor appetite for IPOs of any kind, right? I think back to the class of 2021, which initially there was a lot of enthusiasm, there was a lot of activity, because people were sort of coming off the pandemic, still had a lot of cash, wanted to put it to work in the market. And it, obviously, doesn't feel like we're there right now. But kind of where are we on that continuum?

GREG MARTIN: Well, there's still a lot of cash on the sidelines. There's still a lot of money sitting in money markets. And frankly, the return in the money markets is still pretty strong. It's close to 5%. You know, you're talking generally pretty risk-free. And even in the 10-year and in short-term treasuries, it's still a pretty safe place to generate a healthy return.

So I think that is a real bar for companies to go public. You have to obviously perform substantially better than the risk-free rate of return. And, you know, so I do think that that's going to continue to be a bar. And that's why I said, I think we need to see some of these early companies perform well to get people off the sidelines, to get people out of the safer yielding instruments, because they're chasing more yield again. And if we-- as I said, if we start to see that, if we start to see the kind of historical performance, you know, where it's 10%, 15% and greater type returns, I do think that that's going to be what really propels the IPO market this year.