Podcast Summary
Supporting Education through iConnections Funds: The iConnections funds for teachers initiative aims to support Ron Clark Academy's professional development opportunities for educators, raising funds through events in major cities.
The Wall Street Skinny team is passionate about education and have joined the advisory board for iConnections funds for teachers initiative. This initiative aims to support the Ron Clark Academy and its pioneering teaching methods by providing access to their professional development opportunities for educators nationwide. Through fundraising events in major cities, proceeds will directly benefit teachers to participate in these training programs. Meanwhile, in this episode, Jen and Kristen discuss IPOs, their significance in various industries, and the importance of understanding them for potential investors. They also share their recent experiences, including speaking at Barnard and meeting new people, emphasizing the value of face-to-face interactions.
A new chapter for companies going public: IPOs allow companies to access larger pools of capital, increase liquidity, and gain greater visibility and credibility in the market.
An Initial Public Offering (IPO) is a significant milestone for a company when it decides to sell shares to the public for the first time, allowing people to become fractional owners. Leaving children for the first time after having a third child was a bittersweet experience for the speaker, but it also brought a sense of freedom. Similarly, an IPO marks a new chapter for a company as it transitions from being privately held to publicly traded. Companies may choose to go public for various reasons, such as accessing larger pools of capital, increasing liquidity, and gaining greater visibility and credibility in the market. Understanding the mechanics and benefits of IPOs is crucial for those considering careers in investment banking or the buy side.
Benefits and Challenges of Going Public: Going public through an IPO offers access to more capital, increased prestige, and a broader investor base, but also comes with added expenses, increased transparency, and a focus on short-term earnings.
Going public through an Initial Public Offering (IPO) can provide significant benefits for companies, including access to more capital, increased prestige, and a broader investor base. However, it also comes with added expenses, increased transparency, and the need to focus on short-term earnings rather than long-term growth. Private investors, including employees, can cash out their stock holdings, and the prestige of being a public company can help with business deals and even debt financing. On the downside, public companies face higher reporting fees, increased scrutiny, and the potential for unwanted takeovers. Ultimately, the decision to go public requires careful consideration of the pros and cons.
Going Public: Advantages and Disadvantages for Corporations: The decision to go public involves weighing the benefits of access to more capital and a larger investor base against the risks of relinquishing control and dealing with activist investors.
Going public comes with its advantages and disadvantages for corporations. While it opens up opportunities for growth through access to more capital and a larger investor base, it also means relinquishing some control and dealing with the potential influence of activist investors. This was evident in the cases of Birkenstock and Instacart, two companies that recently went public via different routes. Birkenstock, a 250-year-old German family-owned business, decided to list on the New York Stock Exchange after being bought by a private equity firm. This move came with the added burden of significant debt, a common tactic in a classic LBO. On the other hand, Instacart, a tech startup, had been funded by venture capitalists since 2012. Both companies eventually went public to cash out their investors. The takeaway here is that the decision to go public is not a simple one. It requires careful consideration of the potential benefits and risks, including the impact on ownership, control, and the overall financial health of the company. As the CEO, it's crucial to understand the motivations of investors and the current market conditions before making this significant move.
Understanding the difference between a business's equity and its overall valuation: Equity is the portion of a business owned by its investors, while a company's overall valuation includes debt and other liabilities. It's crucial to distinguish between the two when evaluating IPOs and understanding who is raising the cash.
The value of a business's equity and the value of the entire firm are two different things. This distinction is important to understand when evaluating the valuation of a company, especially during initial public offerings (IPOs). The equity represents the portion of the business that the owners have invested, while the value of the entire firm includes debt and other liabilities. In the case of Birkenstock, a private equity firm bought the business for around 4.8 billion euros, with a significant portion of that coming from debt. When they took the company public, they sold only a fraction of their equity, growing the value of their equity significantly. It's crucial to differentiate between the equity being sold and the overall valuation of the company. Additionally, it's essential to understand who is raising the cash – is it the company or the investors selling their shares. This knowledge can help investors make informed decisions and navigate the complexities of the financial markets.
Lead left and right book runners in IPO process: During an IPO, investment banks, particularly lead left and right book runners, play crucial roles in determining offering price, drafting prospectus, and selling shares, earning significant fees.
During an Initial Public Offering (IPO), companies choose investment banks, referred to as book runners, to help them go public. These banks play a significant role in the process, including determining the offering price, drafting the prospectus, and selling the shares. The lead left book runner holds a coveted position with the most responsibilities and fees, while the lead right book runner and co-managers receive smaller fees. For instance, in the Birkenstock IPO, Goldman Sachs and JPMorgan, as lead left book runners, received approximately 50% of the total fees. The fees for an IPO are typically high, ranging from 6-7% for smaller companies, and the process is highly competitive among investment banks.
Building relationships in investment banking: Senior relationship managers and industry groups build long-term relationships with clients through pitches, leading deals, and industry expertise, which can lead to more opportunities and increased business.
In the world of investment banking, having strong relationships with clients is crucial in securing lead roles in deals, such as IPOs or LBOs. This relationship-building process often begins with a "bake off," where firms pitch why they should be chosen to lead the deal. The senior relationship managers and industry groups within the banks play a significant role in cultivating these relationships, which can span over several years. The prestige of being a lead book runner in a deal can also be a major factor, as it can lead to more opportunities and increased business in the future. Additionally, having experience as an initial lender in an LBO can significantly increase a bank's chances of being chosen as a lead book runner. League tables, which track a bank's past deal activity, can also be a factor in a company's decision-making process, as they provide insight into a bank's expertise and experience in a particular sector.
Manipulating League Tables in Finance Industry: League tables can be manipulated to favor certain banks during IPO process, research analysts' reports significantly impact investor perception, and extensive disclosures are required during IPO filing process
League tables in the finance industry can be manipulated to make certain banks appear more favorable by narrowing down the criteria used for rankings. These tables are used extensively during the IPO process, and the quality of research analysts covering a company is crucial as they write reports that significantly impact investor perception. During the bake-off stage, junior bankers spend countless hours creating impressive presentations, often in large formats, to win the business of potential clients. Once a company decides to go public, they must file extensive disclosures with the SEC, including the S-1 filing which outlines financial information, use of proceeds, and risks associated with the offering.
Determining a company's worth during IPO: Banks use valuation methods like DCF and comp analysis to estimate a company's worth during IPO. The final price is determined by a balance between banks' analysis and investor demand.
During the initial stages of a company's Initial Public Offering (IPO), the banks involved in the process cannot guarantee a specific price. Instead, they conduct valuation analyses using various methods like Discounted Cash Flow (DCF) and comparing comps to determine a potential range for the company's worth. These banks then market the deal to potential investors during the roadshow, gathering indications of interest and eventually setting the price based on investor appetite. It's important to note that the management team, despite having little control over the company's direction, plays a crucial role in meeting investors and presenting their vision. Ultimately, the final price is a result of a balance between the banks' valuation analysis and investor demand.
Proceeds from an IPO: Primary vs Secondary: In an IPO, primary proceeds go to the company, while secondary proceeds are earned by insiders. The primary proceeds can be used to pay down debt or invest in growth, while secondary proceeds are a result of insiders cashing out.
During an Initial Public Offering (IPO), the proceeds raised can be categorized into primary and secondary proceeds. Primary proceeds refer to the funds that go directly to the company, while secondary proceeds refer to the funds that insiders, such as private equity firms, receive when cashing out. In the case of Birkenstock's IPO, the company received primary proceeds of $1.46 billion, which it used to pay down debt. The private equity firm, Caterton, received secondary proceeds. This is a common occurrence in sponsor-backed IPOs, where the proceeds are often used to reduce the company's debt burden or invest in its growth. It's important to understand this distinction, as it can impact the financial position and future plans of the company following an IPO.
Birkenstock IPO did not result in full exit for Caterton: Caterton retained 82% ownership after receiving $1B from Birkenstock IPO, gradually selling shares over time. Pricing was influenced by market dynamics, with DCF analysis suggesting fair value at $41 per share.
The Birkenstock IPO was not a full exit for Caterton, as they still owned 82% of the company after receiving $1,000,000,000 from the IPO. This is a common practice where companies go public and then sell their shares gradually over time. The pricing of the IPO was determined by supply and demand, with Birkenstock ultimately pricing at $46 per share. According to a DCF analysis, the fair value pricing was around $41 per share before taking market dynamics into account. The choice of valuation methods, such as DCF or comps analysis, depends on the industry and can provide different insights.
Determining a company's IPO valuation using multiples: Banks use various multiples to determine a company's IPO valuation, price it at a discount, oversubscribe the book, and use the green shoe option to stabilize the share price.
During an Initial Public Offering (IPO), investors and banks use various multiples, such as Enterprise Value to Sales, EBITDA, and PE ratio, to determine a company's valuation. These multiples depend on projected earnings and growth. Pricing an IPO too high can result in a broken IPO, where the share price goes down instead of up. To prevent this, banks price the IPO at a discount, oversubscribe the book, and use the green shoe option to stabilize the price by selling additional shares. The green shoe option allows underwriters to sell more shares than they initially offer, effectively overselling the IPO. This strategy helps ensure the IPO is successful and the share price remains stable.
Underwriting process in IPOs involves sale of green shoe option for price stability: Underwriting process in IPOs can result in negative consequences for banks' reputation if IPO performs poorly, private investors exit beforehand, and retail/institutional investors buy into potential losses
The underwriting process in IPOs involves the sale of a green shoe option, which gives the underwriters the ability to buy additional shares if needed to maintain the IPO's price stability. If the IPO performs poorly and the underwriters are short shares, they must buy them back in the market, creating upward pressure on the stock price. However, this situation, while technically profitable for the underwriters, can result in negative consequences for the bank's reputation if the IPO is perceived as a failure. This trend of private investors exiting before the IPO, leaving less upside for public investors, has become more common due to the increased presence of private markets and the availability of alternative exit strategies for venture capital firms. As a result, retail and institutional investors may find themselves buying into an IPO when the majority of the potential profit has already been realized by private investors.
Challenging market conditions for IPOs and SPACs: High equity valuations and rising interest rates make it difficult for IPOs and SPACs to generate significant upside, as investors look for alternatives with attractive yields. The dominance of a few large companies in the S&P 500 also impacts the broader market's performance.
The current market environment, with high equity valuations and rising interest rates, has led to challenging conditions for initial public offerings (IPOs) and special purpose acquisition companies (SPACs). As seen with Instacart's IPO, which initially priced at $30 but is now trading below $25, the market has been unforgiving to many newly public companies. This trend is not limited to IPOs, as the performance of SPACs has also been lackluster. The shift in market dynamics, moving from a TINA (There Is No Alternative) environment to a Tara environment, where there are alternatives to equities with attractive yields, has made it more difficult for IPOs to generate significant upside. Additionally, the dominance of the "Magnificent 7" companies in the S&P 500, which make up around 30% of the index due to their large market caps, means that the broader market's performance is heavily influenced by their performance. Overall, the current market conditions present challenges for new public offerings and may favor alternative investment opportunities.
Navigating the Financial World: Founders and Investors: Be knowledgeable about successful founders' experiences and various investment areas like venture capital, private equity, and private credit to excel in investment banking, equity capital markets, or founding a company.
Considering a career in investment banking, equity capital markets, or founding a company involves understanding the intricacies of the financial markets, including the process of initial public offerings (IPOs) and the potential risks and rewards of investing in a company during its growth stages. This discussion emphasized the importance of being knowledgeable about the experiences of successful founders and the various investment areas such as venture capital, private equity, and private credit. Whether you're aiming to be a founder or an investor, being well-versed in these topics is crucial for navigating the financial world. So, if you're interested in these fields, make sure to educate yourself thoroughly and stay updated on the latest trends and developments. Additionally, following Wall Street Skinny on social media and subscribing to their YouTube channel can provide valuable resources and insights to help you get started.
