What Rising Bond Yields Mean for the IPO Pipeline

Schwab Network (0:00)

That's right, Marlee. Thank you so much. Yes, joining me here at the desk is my namesake, Sam Kerr, who is the head of Global ECM and Merger Market EMEA, who you also share a name with a very good football player.

Samuel Kerr (0:10)

I do, I do. That's why I always go by Samuel, right? Because it's just to not get the confusion.

Schwab Network (0:14)

Exactly, exactly. You don't play for the Matildas or Gotham FC. Let's just make that clear.

All right, Norah, you Australian. But Samuel, this is a very interesting IPO market here in the US. Obviously, it's changed a lot in just the last few weeks. These pushbacks, these delays, some of them have hit snags on a couple of reasons. I'm just wondering what that's telling you right now.

Samuel Kerr (0:35)

I think it's what they're telling me is the investor base of becoming very worried about what we've been seeing in the bond markets. When you see sovereign yields go at the speed that they're going upwards, the US 10-year going up to five and a half in just a couple of weeks, really. I think you're starting to get investors look and think, okay, we need to pause our breath here. We need to really assess what this is going to do to company finances, financial fundamentals, and the highest risk investment that you could make at any time as an IPO, certainly in the equity market. So I think they want to take a step back and have a look and see how this plays out.

Schwab Network (1:08)

But what is this being driven by, do you think? Because there was SPE Energy, for instance, that seemed to be around evaluation concern. Obviously, you've got Anthropic, OpenAI at a time when Sam Altman has been pretty explicit in saying, we want to get this stuff right. We want to do it safely. We want to do it at the right time. But then you've had some others who have, like Aura, for instance, and I know that you've highlighted that, and you know it's not an AI company, couldn't give any particular reason other than current market uncertainties and conditions. Now, we don't know when the next date is going to be. So, I mean, it just seems to be a number of reasons.

Can you understand what the bigger picture is here?

Samuel Kerr (1:51)

I think you hit on it at the beginning, it's valuation. So, when you have such stress in the bond markets, like we're seeing at the moment, such stress on company financials and the general economy, I think people ask for far more when it comes to valuation. So, IPO investors want that far bigger discount to offset the fear that's going on in the bond markets. And the reasons for that really are sort of technical, right? So, higher weighted average cost of capital when you have yields going up in the way that they're going. You also have the comparative advantage of bond markets. So, if you're a large mutual fund and you can get five and a half percent return on the 10-year treasury, that makes equities slightly less attractive, and then taking a risk on something like an IPO even more or less attractive, right? So, the comparative cost of risk versus reward when the bond markets are like this shifts on the market. And I think we're going to start maybe seeing that a bit more. It's interesting, right? If you look at the indexes, it doesn't look like there's anything wrong.

Schwab Network (2:38)

No, I mean, records after records.

Samuel Kerr (2:39)

Absolutely, right? But you think below the surface, below the Mag-7, the Mag-8, if you include SpaceX now, we're actually starting to see a lot more pain coming through.

Schwab Network (2:48)

And we were just having a discussion about that with our previous guest as well. And some of that dramatic deterioration under the surface. I mean, breadth has looked encouraging and pretty supportive in recent days. Let's see how long it lasts. But as far as the timing of Anthropic, I mean, we're expecting this at some point in this quarter, at least. Like we saw with SpaceX, do you anticipate the tide comes out a bit?

We see some chips coming off the table to allocate into something like that.

Samuel Kerr (3:14)

We're already seeing that. And it's being talked about in the markets, right? In the US and actually in the global IPO market. If people think they're gonna be having to allocate a $100 billion deal, people are gonna keep some power to drive for that. I think anything with an AI link might not be able to go really before Anthropic, because people are gonna be sitting there thinking, well, I'm gonna have to bet so much on the sector in that deal. You know, I want something else to come later. So that might be a little bit of that sort of facet going on there. And with other IPOs, again, it's just pure risk capital, right? Do you really want to be putting money to loads of IPOs when you know that you have a $100 billion deal potentially around the corner?