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Courtesy of PricewaterhouseCoopers International Limited

(Q3 2023 Capital Markets Watch)

The US economy has shown remarkable resilience over the last year. Consumer spending has held up in the face of higher prices and interest rates, while businesses have trudged through uncertainty without the economy falling into recession. US stock markets are slightly down for the third quarter but the S&P 500 remains in positive territory for the year.

Gains have been fueled by the tech sector, largely due to the strong performance of a small number of artificial intelligence (AI)-related equities. In contrast, US capital raising activities through IPOs and debt remained relatively subdued, indicating a more measured approach from investors. Still, there’s building anticipation about the potential for the IPO window to finally reopen as a few notable companies held public offerings.

US economic growth accelerated in the third quarter on the back of ongoing consumer strength and a recovery in factory activity. However, PwC expects this acceleration will likely be short-lived due to a lagged response to higher borrowing costs, lower savings, and other emerging risks like the auto workers strike and a possible government shutdown. The Federal Reserve is nearing the end of its rate hikes, but a tight labor market and elevated wage pressures mean further rate hikes can’t be ruled out.

While the economy will likely avoid a recession in the near term, PwC expects US growth will likely slow next year. PwC’s baseline expectation is for real GDP growth to top 2% in 2023, but then slip to about 1.5% in 2024.

After six quarters of nearly frozen IPO activity, the third quarter showed modest signs of life marked by a few well-known companies that were able to successfully execute IPOs. Investors remain focused on profitability and cashflow — reenforcing our view that “growth at all costs” companies still face challenges in accessing the market. A semiconductor giant filed for one of the largest tech IPOs in the past 20 years, and two tech unicorns and two biotechs also filed publicly in recent weeks. We could see more IPOs in early 2024 if returns hold up and market conditions continue to ease.

The debt markets have also seen pockets of optimism. Issuance remains confined to higher rated credits and has largely favored secured borrowing. Banks have been successful in selling off most of the debt from the 2022 LBOs that they held onto given the rapid deterioration in market conditions from when the deals were announced to when they closed. This has provided them with a greater ability to underwrite new deals. With more visibility into the end of the Fed’s tightening cycle, the market should see an uptick in M&A and LBO announcements.

US debt markets show signs of life


  • The US debt capital markets raised $379 billion in the third quarter across the investment grade (IG) bond, high-yield (HY) bond and leveraged loan (LL) markets

  • In the leveraged finance market (HY and LL), we saw issuance of $124 billion with 39% supporting M&A and LBO activity. The relatively high interest rate environment has contributed to the significant slowdown in both LBO’s and the broader M&A market.

  • While M&A and LBO activity has stalled in 2023, dealmakers have looked to creative financing solutions for the deals that have come to market. Notably, a large LBO announced in August 2023 involved a whole business securitization in order to secure the financing required. Other structures like all-equity backstops, sellers’ notes, paid-in-kind (PIK) financing, convertible notes and others are likely to remain prevalent in the high-rate market.

  • In line with prior quarters, refinancings continue to be the main driver of new deals in the high-yield bond and leveraged loan market with nearly 50% of issuance. Leverage loan repricing activity has also made a dramatic comeback this quarter with issuers revisiting prior loans to negotiate for lower margins amid the firming market conditions.

  • Looking ahead we expect to see M&A and LBO activity pick up when the Fed officially ends its tightening cycle. Market conditions continue to firm up as the likelihood of a soft landing improves — providing both borrowers and lenders more comfort as they enter the markets.

AI Continues to Drive Interest:


  • The US venture capital (VC) market raised $31 billion in the third quarter of 2023, continuing a decline from 2021 highs.


  • Artificial intelligence continues to dominate the headlines with $7 billion raised.


  • Out of the 63 megarounds (rounds over $100 million), AI and machine learning companies have comprised 18.


  • Notably, the market has seen a few high-profile unicorns take down rounds ahead of a potential exit. Management teams and their financial sponsors are beginning to recognize the new normal for lower valuations. With about 700 unicorns in the US, it’s likely that this trend will continue.  


  • Seven of the IPOs priced in the third quarter have been venture backed. The success of these IPOs and the valuation step-up or step-down from the latest round of private fundraising will provide clarity into the later stage financing environment for private companies and their VC backers.


  • Looking ahead, it’s likely that the VC market will continue its slow recovery. VC firms are increasingly looking for proven business and product market fit and will require more investor-friendly provisions. While dry powder levels are still near their highs, the capital remains largely still held by the LPs and doesn’t yet count toward the fund performance. 

Recovery Remains Elusive:


  • Q3 quarter-to-date saw nine traditional IPOs raising $7.6 billion.


  • In the last few weeks, three large tech companies went public. All of their shares rose on their first day of trading but have retreated since.


  • The third quarter saw 36 SPAC merger announcements and 21 SPAC merger completions. Merger announcements have decreased compared to prior quarters.


  • The S&P 500 fell 3% quarter-to-date (up 13% year-to-date). This quarter’s traditional IPOs are down nearly 14%, underperforming broader indices. IPOs that priced in the last 12 months have, year-to-date, generally underperformed broader market indices.


  • Looking ahead, a resurgence in IPO activity could be dependent on how well the big-name IPOs perform in the medium term. There’s still a solid pipeline of companies waiting for the late first and second quarters of next year, assuming stability in interest rates and the economy, and listing company willingness to accept valuation resetting back to pre-pandemic norms. 

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