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Daily Intelligence Briefing

Tuesday, January 23, 2024

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.

I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

IPO Activity Could be on Brink of Revival as Record Number of Unicorns Remain in Pipeline

Summary: Though startup funding dropped off significantly in 2023, leading to a collapse in the number of new unicorns, the number of active unicorns rose to an all-time high, suggesting numerous blockbuster IPOs are in the pipeline. IPO volume was also down last year, compounding a similarly slow 2022, but nearly 100 companies have recently filed with Nasdaq for public listings confidentially. 


Declining long-term rates and the expectation that cuts to short-term rates will soon follow, could make equity markets a much more hospitable environment for new listings this year, reviving IPO activity. An area of particular interest will be AI, which has continued to pull in large swathes of VC cash in spite of the broader downturn in private fundraising. It is only a matter of time before pure-play AI startups begin planning to make public debuts.


Related ETF: Renaissance IPO ETF (IPO)

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Startup funding declined by nearly -30% in 2023, down to a sum of $170.6 billion. That was less than half of the $348 billion expended on venture funding in 2021. Just 45 new unicorns (a privately held startup company with a valuation of $1 billion or more) were minted in 2023, the least in any year since 2017, and down -87% from 2022, according to PitchBook data. The upshot, however, is that the total number of active unicorns closed out 2023 at an all-time high of 723. This means that a large number of billion-Dollar companies have yet to IPO, a promising prospect for the public offering pipeline.


154 companies went public in the US in 2023, down -15% percent from the 181 firms that had launched an IPO in 2022. Last year’s final tally was the smallest number of annual listings in seven years. According to Barron’s, the combined number of 2022 and 2023 IPOs marked the slowest two-year period for new issues in more than 40 years, and did not even reach a third of the record 1,035 public listings that went ahead in 2021 alone. That year, defined by near zero interest rates, a massive increase in the money supply, and all-time highs in key equity indices like the S&P 500, was prime time for companies to quickly capitalize on a tidal wave of liquidity in the US and beyond. Bloomberg reports that $26.2 billion was raised on US exchanges via IPOs last year, a modest bump from last year, but still a -92% plunge from 2021.


According to Stock Analysis data, the average return on 2021’s sizeable pile of IPOs to date (excluding those that have undergone a merger or acquisition) has been -15% and roughly 23% of those companies have seen their share prices cut in half from the date of their initial public offering. However, the latter figure is down from more than 35% when MRP reviewed the IPO market last November, as many companies benefited from a late-year rally in equities.


As MRP previously noted, speculation and several high-profile filings have been pointing toward a heating up of IPO activity throughout 2024. At the time, we highlighted a recent IPO filing from Chinese fashion startup Shein and rumors that social media giant Reddit was once again considering a long-anticipated public debut. Though Shein’s offering may be delayed by heavy-handed Chinese regulations, Reddit is reportedly moving toward an IPO date in March. Much more activity appears to be happening behind the scenes, under the veil of confidential listings. According to Nasdaq CEO Adena Friedman, close to 100 companies recently have filed confidentiality with the SEC for initial public offerings and plan to list on the tech-heavy exchange.


Despite the Federal Reserve’s benchmark short-term rate remaining at multi-decade highs, a whittling down of long-term rates and the expectation of oncoming cuts to the Fed Funds rate throughout the next couple of years has bolstered equity indices. The S&P 500 reached an all-time high just yesterday and the Nasdaq is less than 5% from surpassing 2021’s record close. If the pattern of economic growth remains intact, 2024 will certainly prove to be a much more hospitable environment for public market debutants.


An area of particular interest will likely be AI, which has kept a solid hold on VC interest in spite of the broader downturn in funding. Outsized investments in top AI startups OpenAI and Anthropic accounted for 10% of the total deal value in 2023. Among the relatively small number of new unicorns, 44% were AI and machine learning companies. In the first weeks of 2024, new AI unicorns are already taking shape. Following Voice AI startup ElevenLabs’s $80 million Series B, the company did not release an exact valuation figure, but it did note that it had reached “unicorn status”. Meanwhile, enterprise AI startup Cohere is reportedly in discussions to raise capital in the ballpark of $500 million to $1 billion, which would likely expand a previous valuation of $2.2 billion. With this amount of cash flowing into AI-focused startups, it’s only a matter of time this until these machine learning unicorns begin looking toward lucrative IPOs in public markets.


One way investors can gain exposure to newly-listed firms is via The Renaissance IPO ETF (IPO), which seeks to provide investors with the largest, most liquid US-listed newly public company stocks, rebalancing each quarter as new IPOs are included and older constituents cycle out three years after their IPO.


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