How will companies encountering a closed IPO window fare in the new market reality?

The below is excerpted from Forge’s May Future Private — a webinar series offering perspectives on the private market. To see the replay of the latest Future Private - visit this page.

There are two things Blythe Masters, says could characterize the companies that will emerge from this period of market volatility and dislocation intact: those well-positioned to benefit from mega trends, and those that are well-operated with focus and discipline even before public markets began their steep decline.

Well-positioned companies in categories at the confluence of megatrends, for instance, the digitization of asset classes, are at an advantage, said Masters, a Founding Partner at Motive Partners and a Forge board director.

“That’s a trend that will only get accelerated over in the current environment,” Masters said.

“Operators who will be successful are those who focus on cost control and making sure their products have defensible unit economics. They need to present a clear path to profitability or ideally present profitability,” she said.

And they need to focus on cultivating and retaining talent.

“Operators that aren't focusing on their people, especially in this environment, are going to lose out,” Masters said.

As companies contemplate exit strategies, they’ll need to think about two things, Masters said.

“Obviously, if your trajectory was for a public markets exit and that window is now less feasible, you need to be thinking both about alternative sources of liquidity and how you operate in that environment without the public market source of liquidity that you had perhaps been planning on,” Masters said.

She said she expects M&A to accelerate.

“There’s no doubt that this environment will drive a consolidation wave in many sectors, driven by the need to solidify market positioning, cut costs and extract synergies, and for stronger companies to absorb their weaker competitors,” she said.

What’s more, Masters expects current market conditions will drive ‘mergers of great equals’ where large and growing companies are better together.

“And indeed we’re already seeing that across our world of fintech,” she said.

As companies are rethinking exit strategies, Masters still sees SPACs as a viable option but said the current economic conditions, SEC scrutiny and some of the busts that characterized 2021/22’s big SPAC wave have served to weed out many of the companies and SPAC sponsors that weren’t equipped to be successful in the first place.

“The SPAC market was populated by many sponsors who really didn’t have professional credentials. It was populated by many companies that probably could not have made it public by a more conventional route. They’re just companies that really didn’t stand up to the kind of scrutiny process that an IPO would have put them through.”

Proposed increased regulation of SPACs, “from our point of view, it codifies what we consider to be best practices,” she said.

SPACs that can be successful going forward will need to be equipped with a track record of success, a network, and a stable of portfolio companies that bring synergies, innovation capabilities, and in-house technology and operating capabilities.

“And sponsors have to put their money where their mouth is,” she said.

While markets are volatile, the spillover hasn’t fully taken shape in the private market yet.

“There’s still a surprising amount of dry powder left in the private market,” Masters said.