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Stay informed with our daily email, the myFT Daily Digest, which provides you with the latest news in the Capital markets every morning. Contrary to popular belief, the saying “darkest before the dawn” doesn’t quite fit when discussing the market. Instead, it can be said that it’s coldest before the dawn, a less poetic but more accurate description.
Morgan Stanley analyst Edward Stanley reveals some intriguing charts that shed light on the current state of venture activity. According to historical trends, we may be experiencing a period of chilliness before the market starts to recover. If the fourth quarter proves to be the bottom for IPO and public market secondary activity, past cycles spanning nearly three decades suggest a robust rebound in 2024/25. Under this scenario, the average deal volume and value in Q4 2024 could jump by 90% and 160% respectively from the lows. By Q4 2025, those numbers could potentially rise to 100% and 240% respectively. However, it’s still too early to determine if a new trend is beginning, despite recent IPOs generating optimism in the market for potential exits.
Although the light at the end of the tunnel may be visible, we must acknowledge the pain of the current downturn. When comparing this cycle to previous ones, the current cycle surpasses the average duration of lows in deal value and volume. Transactions have experienced a greater decline in value than in volume. At this point in the cycle, the data from the past three decades indicate that the 2022 cycle is the worst in terms of deal value and volume.
Let’s take a visual look at these trends in the form of squiggly lines:
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So, can we expect a comeback in the near future? If so, what can historical data teach us about this potential outcome? According to Morgan Stanley, IPO and secondary market activity tends to rally for around three years on average, following the average drawdown period of 28 months that we have just surpassed. Edward Stanley further explains:
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To provide more detailed analysis, the value of IPOs and secondary deals usually experiences a 2:1 ratio of increase and decrease respectively, compared to deal volumes. In the current cycle, the combined value of IPOs and secondaries has dropped by approximately 72% in relation to the decline in deals, which is around 50%.
While these trends present promising possibilities, time is never simply a repeating cycle. We spoke to Stanley, who emphasized that the current market reopening has a significantly different backdrop compared to previous ones. One major concern regarding the 2024 comeback theory is that many companies that were expected to go public in the next cycle have already done so during the IPO rush in late 2020 and early 2021. Another potential issue revolves around managing expectations for “unicorns” in the zero-interest-rate era, as their valuations may face a reality check:
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With roughly 1,400 “unicorns” in the market, it’s crucial to reassess their valuations, as 44% of their current valuations were based on raises during a period of zero interest rates. Since then, these valuations haven’t been reevaluated. Therefore, the future of capital markets may depend on banks convincing tech leaders that their valuations might not be as inflated as they perceive them to be. We’ll see if that happens, but we’re not holding our breath.
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