Private capital rushes to fund green energy innovators

On August 24, the Texas Comptroller of Public Accounts, Glenn Hegar, announced a list of prohibited financial companies including banks and asset managers that he claims boycott energy companies. Texas state entities, including public pension funds, must now divest from them in accordance with the bill that governor Greg Abbot signed into law in June 2021.

The comptroller’s office is attempting to tie these companies, their anti-oil and gas rhetoric and misguided activism around proxy voting to the elevated energy costs Texans face. It points to what it calls an increasingly hostile federal regulatory environment hampering new domestic energy exploration and production.

“My greatest concern is the false narrative that has been created by the environmental crusaders in Washington DC and Wall Street that our economy can completely transition away from fossil fuels, when, in fact, they will be part of our everyday life into the foreseeable future,” Hegar stated.

Listed companies include BlackRock, Jupiter Fund Management, Schroders and a number of large European banks such as BNP Paribas and Credit Suisse. Presumably, US lenders get a free pass for their abundant financing of oil and gas.

Investors focused on environmental, social and governance (ESG) issues have become an easy target in the US for politicians seeking to avoid blame for energy shortages and soaring costs, as if these 'woke' funds have robbed oil and gas firms of the funding needed to ensure plentiful supplies.

“The situation we are in now in Europe was entirely avoidable,” one energy industry source tells Euromoney. “We all need power. We could have expanded gas fields in the North Sea or gone into fracking, as the US did to become energy self-sufficient. But even the oil companies got holier than thou. BP has been so vocal about decarbonization and increasing investment in non-oil and gas, even though all the value is in its oil business. You should hear what many of the people inside that company really think. The pendulum swung too far and we are all going to pay for the consequences.”

Now, as politicians fire up the coal power stations again, oil and gas companies’ stock prices are soaring along with their profits, while most others’ fall. The ESG funds haven’t even produced decent returns.

As secondary markets decline, it is almost impossible for growth companies to scrape together capital through initial public offerings today.

But away from the shuttered public equity capital markets, substantial volumes are still being raised through private placements of equity to big investors with plenty of money to put to work.

Freed from the noise of public stock markets, these big funds are happy to back their own long-term views of the most promising growth businesses. And surprise, surprise, many of the issuers taking advantage with big placements focus on green energy and dealing with the climate crisis.

Forget the backlash against ESG. The energy crisis has made the size of the total addressable market clear. Even as they build plants and factories, many of the young companies now raising hundreds of millions of dollars at a time already have customers lining up.

Green energy innovators are both a beneficiary and a proof point of the fast-maturing primary market in private equity placements.

On August 30, UBS announced long-term agreements with two Swiss companies, Climeworks and neustark, pioneering new carbon removal technologies.

Neustark specializes in the petrification of atmospheric CO₂ in recycled concrete. Climeworks operates the world’s largest direct air capture and storage facility in Iceland. Called Orca, it takes the stuff from the atmosphere and locks it underground in basalt rock where it should remain for many thousands, possibly millions, of years.

Orca went into operation in September 2021. It removes historic CO₂ and is situated close to renewable geothermal energy so as not to produce more carbon in the process.

The agreements come as part of UBS’s commitment to achieve Net Zero from its own operations by 2025. Its aim is to remove 39,500 tonnes of CO₂ over 13 years. Climeworks should account for 10,000 tonnes over the next decade.

That sounds like a big number. Yet it is a drop in the ocean. In its sixth assessment report on climate change mitigation, the Intergovernmental Panel on Climate Change estimates that by mid-century between three and 12 billion tonnes of CO₂ will need to be removed from the air every year if we are to have any hope of limiting global warming to 1.5°C.

Carbon capture could become – arguably, needs to become – a very big business. And even if the debt and equity capital markets are going through a rough patch right now thanks to inflation and rising rates, these companies need funding.

UBS is doing more here than burnishing its own sustainability credentials. Commitments from large and well-rated corporate clients to buy their products de-risk startups for other investors and bring precious revenue they can use to build out operations.

Following earlier purchases from Stripe, Klarna, Square, LGT and Verdane, UBS is the latest and largest financial services company to commit to Climeworks’ carbon removal solution with its 10-year off-take contract.

“In the past months, the number of multi-year carbon removal agreements has increased rapidly,” states Christoph Gebald, co-founder and co-chief executive of Climeworks. "Such long-term commitments are central to our growth planning and enable us to scale up."

Presumably UBS also had a good chance to assess Climeworks’ investment case earlier this year, when the company was out raising capital in one of the largest equity private placements of 2022. These have continued even as public equity capital markets seized up.

In April, as war in Ukraine cast a dark pall over capital markets, JPMorgan, as sole placement agent, led a SFr600 million ($650 million) equity round for Climeworks.

Partners Group and GIC co-led the financing, which attracted a mix of large financial and specialist technology and infrastructure investors including Baillie Gifford, Carbon Removal Partners, Global Founders Capital, John Doerr, M&G and Swiss Re, alongside long-term anchor shareholder BigPoint Holding.

Climeworks said that the equity raise would unlock the next phase of its growth, scaling direct air capture up to multi-million-tonne capacity and implementing large-scale facilities – more Orcas – as carbon removal becomes a trillion-dollar market.

The sharp second-quarter sell-off in equity markets was then just getting under way, following the initial plunge and then recovery after Russia's invasion in February. The Swiss Market Index hit 12,500 in early April and fell to 10,400 three months later.

As IPO markets closed almost everywhere except in the Middle East and executives at growth companies worried about how to raise the funding needed to keep going, ECM bankers were doing their best to sound encouraging.

The private markets for equity financing remained open, though more selective than in the heady days of 2021.

“There is a host of rapidly growing businesses across multiple verticals in the energy transition space,” says Aloke Gupte, co-head of equity capital markets Europe, Middle East and Africa (EMEA) at JPMorgan. "Availability of private capital for them is now abundant.

“We have seen the development of a large, diverse and global investor base for private capital prepared to take a long-term view. And that’s good for the world as some of these technologies need time to develop on an industrial scale. This availability of capital has increased exponentially over the last five years or so.”

Accessing it is not straightforward, however.

Jason Hutchings, head of the natural resources group and of the private financing markets team in EMEA at UBS, tells Euromoney: “I see these private placements as almost closer to M&A than to equity capital markets, even though, at the very end, there is an element of syndication. Lead investors have access to far greater due diligence than they would ever get on an IPO, much more like a potential acquirer. And that process also allows management to lay out the whole investment case.”

Lead investors are crucial to these transactions, even more so than cornerstones on IPOs. Some of the follow-on investors that then buy a portion of large private deals simply piggyback on the leads’ work and, especially if these are well-known and regarded venture capital investors, may do little due diligence of their own.

“We are seeing a lot of big deals in energy storage, energy transition, food technology,” says Hutchings. "ESG is a big thematic, which I believe ties into the fall in public and private valuations of pure technology stocks and the switch away from growth towards value.

“Many of these energy transition companies are asset heavy, even if they are pre-revenue,” he adds. “Lead investors can go deep into the equity story and take a view that a company is likely to be very valuable in two or three years’ time, whatever the volatility in public stock prices.”

The summer stock market bounce, which followed the July US Federal Reserve meeting and lasted until Jackson Hole at the end of August, may have helped other private equity financings get completed. But the investment case for companies seeking money to address the climate crisis looks to be growing stronger, not weaker.

At the end of July, Octopus Energy, the clean energy tech company, completed a $550 million funding round, including a $225 million investment from the Canada Pension Plan Investment Board. Part of the proceeds will go into development of its technology platform, Kraken, which supports the company’s own retail, generation and flexibility businesses and is also licensed to other big energy players, including E.On and EDF in the UK.

Private deal flow has remained strong every month in 2022, no matter how badly the quoted stock markets performed.

“A lot of stocks were oversold during the second quarter, and then around 60% plus of companies in Europe beat estimates on second-quarter earnings,” Gupte says. “Companies in the US did even better. Volatility has kept cash on the sidelines, but this is not a liquidity crisis. Public companies have performed well and delivered good results.”

Private markets are not immune to what’s going on in public equity. Issuers have had to adjust their message to potential backers.

“Some of the high-growth sectors saw market corrections dating back to November 2021,” says Gupte. "And companies have moved early to adapt, to not only focus on growth but also on the path to profitability."

As to private capital raising, he says: “If you look at high-growth companies in sectors like energy transition, energy tech and industrial tech, we have done more deals in 2022 than in 2021.”

Are the private equity capital markets now more open to issuers than the public equity capital markets?

“Very much so, yes,” says Omri Lumbroso, head of EMEA private placements, special purpose acquisition companies (Spacs) and UK equity capital markets at Credit Suisse. "There has been a significant structural change in the market and investor base, especially in Europe, for private equity placements, with a lot of dry powder looking to be put to work."

The traditional venture capital firms have raised big growth equity funds and so have some of the large asset managers that previously concentrated on public equities.

Big private equity fund managers no longer only buy whole companies. Most have also raised large funds to take minority stakes in growth stories, and these can be quite flexible and buy instruments beyond straight equity. Those funds are still experiencing inflows, as opposed to the outflows from many public equity funds.

Bankers suggest that just across venture and growth equity funds, dry powder now amounts to $875 billion.

Many investors have also allocated to crossover funds run by managers that mainly hold publicly quoted stocks but have the flexibility to allocate a portion – perhaps 5% – to illiquid private shares.

Other investors, such as the big Canadian public pension plans, directly lead such deals themselves rather than remaining limited partners waiting to be called on. In February, Canada Pension Plan Investment Board with Motive Partners provided $1.4 billion of equity to the New Zealand fintech FNZ in one of the largest-ever primary equity raises in the wealth management sector.

And corporate venture arms are also present in many transactions.

“I know it seems illogical that the private markets should be open when the public markets are not,” says Hutchings, “but the reality is that there is an awful lot of money to go to work. An investor that believes in a thematic structural shift and a specific company’s fundamentals can put on a position in a private deal and not have to mark it to market every day.”

Then there are sovereign wealth funds, family offices, hedge funds and the other usual suspects that in recent years have grown used to seeking alpha in less liquid names and still see some potential to back winners early on.

“It’s been a gradual change,” says Lumbroso, "but the equity private placement market is massive now, and despite some pull-back in certain sectors this year, it’s not going to go back to what it was five years ago.

“It’s here to stay as a robust alternative source of capital for growth companies and even for more mature companies that are profitable and could alternatively IPO.”

Suneel Hargunani, co-head of EMEA equity capital markets at Citigroup, agrees: “The private market and origination of deals is becoming more mainstream. We’re seeing more requests for proposals on private deals and formal mandates, rather like on IPOs. The big banks have teams of people dedicated to this business now. We’re even seeing the capital markets advisory firms getting involved in private capital raises.”

However, you must be careful whenever bankers invite you to ignore the part of their business that is publicly collapsing and look instead at a more obscure corner that they say is booming but where there is no common agreement on statistics.

Some private equity deals become widely known and talked about: others do not. Issuers and investors often want to keep the terms private, not least because many of these deals are not common equity. Rather, they are structured, sometimes as convertible preference shares, at other times as straight preference shares with guaranteed coupons and seniority in the capital structure in the event of liquidation, or even as debt with warrants.

The option to sell such debt-like instruments depends on the capital structure and leverage of the issuer but offers downside protection to nervous investors. They also allow issuers to raise new money without establishing a new lower equity valuation than in previous rounds.

Investors turn to structured deals when they hope to capture bargains but are nervous about the economic outlook.

Larger issuers like to do them to avoid diluting existing shareholders and having more voices to listen to, as well as to skip a down round, especially in the last capital raise before an IPO.

In private capital markets, common equity prevailed in 2021 and is still the route for early-stage companies; structured deals are more common in 2022.

Existing shareholders may have mixed feelings: pleased that they don’t have to mark down their own existing equity positions and that they are not being diluted but irked at the structural subordination.

PitchBook, Dealogic and Refinitiv capture details on some transactions but not all. And definitions of which deals count vary.

Speaking in August, JPMorgan’s Gupte says: “Last year, we had $70 billion of private equity issuance in Europe, this year it is about $57 billion. The banks’ capital markets desks focus predominantly on pre-IPO placements for growth, new economy, technology and industrial companies. Volumes have fallen from 2021 but not by a lot.”

And that decline has been nowhere near as dramatic as in public ECM. EMEA IPO volume was down 80% in the first half, with what little volume there was coming mainly from 17 deals in the Middle East, together worth $15 billion.

Lumbroso at Credit Suisse has similar figures: “If you look at equity private placement raises of $100 million or over for growth purposes, we have seen $56 billion of raise volume this year. And while that’s 25% down on last year, 2021 volumes were almost three times greater than the previous annual record.”

Strip the Middle East out of EMEA and by early August, Lumbroso suggests, Europe had seen just $5 billion of IPOs in 2022. The entire public equity capital markets accounted for just $51 billion of volume in Europe, lower than the number for the private markets.

It is the first time that this has happened.

Are there now then two very different and substantial equity capital markets for issuers to assess? Or are the private markets just a less liquid and so delayed version of the public?

It’s complicated.

Private equity funds may want to avoid the mark-to-market hits that public equity investors must acknowledge straight away when quoted share prices fall. But private market valuations are not divorced from those in public markets, where rising rates apply an almost automatic discount. They are closely linked, even if revaluations are not immediate.

“Private equity does not exist in its own micro-climate,” Hargunani tells Euromoney.

In January 2022, London-headquartered payments company Checkout.com – first founded as Opus Payments in Singapore in 2009 but now a global processor for merchants such as Netflix, Farfetch, Grab, NetEase, Pizza Hut, Shein, Siemens and Sony – closed a $1 billion Series-D round that doubled its valuation to $40 billion from its previous fund raise a year earlier.

The company was chasing growth in the US market and in Web3, and attracted primary investors at this new valuation including Altimeter, Dragoneer, Franklin Templeton, GIC, Insight Partners, the Qatar Investment Authority, Tiger Global and the Oxford Endowment Fund, alongside other existing investors.

Seven months later, Swedish payments company Klarna was raising $800 million at a post-money valuation of $6.7 billion, down from $45.6 billion in June 2021.

That it had hit such a valuation is bizarre.

“In those days, issuers used to open their doors and investors would throw in bags of money,” one banker says. "When they had enough, they closed their doors."

Klarna argues that its new valuation is three times greater than at the end of 2018. But that’s still an 85% fall from its peak. Over the same period, the Nasdaq Index fell just 20%.

Could conditions actually be worse in private equity markets than in public stock markets?

Other entrepreneurs fundraising at the same time as Klarna were also struggling.

“Unless you have strategic investors, it’s not just difficult, it’s almost impossible,” one weary source at a big fintech tells Euromoney.

However, the Climeworks deal showed that it was still possible to raise new equity. And other large private placements have followed.

In July, the three biggest banks in equity capital markets – Goldman Sachs, JPMorgan and Morgan Stanley – joined forces to lead a $1.1 billion convertible note for another ESG-themed issuer, Swedish battery maker Northvolt.

“At the margin, we have been positively encouraged that it has continued to be possible to complete substantial private transactions for issuers when the IPO market has been so selective,” Martin Thorneycroft, head of EMEA cash equity capital markets at Morgan Stanley, tells Euromoney. “That being said, by no means all companies that are unable to complete their IPOs will be able to raise capital in the private markets.”

Many companies that were going to IPO in 2022 have chosen to wait until 2023, sitting on the cushion of funds already raised. In some cases, waiting a year might be a stretch and companies need to issue a new mix of debt and equity in the private markets.

Northvolt is a different case, as are others building expensive new plants but already with big off-take contracts.

“We have been able to support businesses such as Northvolt and H2 Green Steel to raise capital to support long-dated capital investment programmes where the future revenue models are well understood,” says Thorneycroft.

And while they have raised large deals, these issuers did not pivot from planned public flotations to private placements instead.

“These types of businesses may require several rounds of private funding over a period of years between inception and coming to the public markets in an IPO,” says Thorneycroft.

Like Climeworks, Northvolt’s investment story is all about sustainability; in this case, the delivery of batteries to enable decarbonization through electric vehicles. It produced its first battery cell in Skellefteå, Sweden, just before New Year’s Eve 2021 and made its first commercial deliveries during the spring of 2022.

Northvolt is now developing manufacturing capacity to deliver on $55 billion in orders from customers including BMW, Fluence, Scania, Volvo Cars and Volkswagen.

As with Climeworks, these off-take contracts are both a source of future funding and a cornerstone of the equity story.

Volkswagen Group even participated in the fundraising alongside investors including AMF, AP funds 1-4, ATP, Ava Investors, Baillie Gifford, Compagnia di San Paolo, Folksam Group, Goldman Sachs Asset Management, IMAS Foundation, Olympia Group, OMERS Capital Markets, PCS Holding, Swedbank Robur and TM Capital.

Northvolt has now raised close to $8 billion in equity and debt since 2017. Peter Carlsson, co-founder and chief executive, states: “The combination of political decision making, customers committing even more firmly to the transition to electric vehicles and a very rapid rise in consumer demand for cleaner products, has created a perfect storm for electrification.”

The company intends to source 50% of its raw materials from recycled batteries by 2030.

It is an enormous deal for such a young company, suggesting that for the right issuers there is almost no size limit in private equity raising. But let’s not forget that this was not common equity. It was a convertible note.

Away from the deal, Citi’s Hargunani points out: “It is challenging to go public right now, but there are still plenty of companies that need capital. A key aspect of the private markets is that they offer substantial structural flexibility. If there is interest from an investor in a company that wants to raise capital, you can usually find a way. There are many more levers to pull in private markets.”

Convertibles are just one lever. These may be mandatory pre-IPO convertibles or ones to be priced after the eventual IPO but that do not set a valuation now when multiples are low. Another is equity-like securities with a liquidation preference against pure common stock. Issuing straight equity has become less common as issuers desperately seek to avoid the dreaded down round.

Mezzanine debt with warrants gives new buyers some equity upside but avoids immediate dilution of existing shareholders while also side-stepping the down round.

“The private markets aren’t a sideshow keeping us busy while the IPO market is challenged,” says Hargunani. “It’s a growing market that we believe is here to stay and one that originators need to be fluent in.”

Private deals keep coming. At the end of August, H2 Green Steel, a Swedish company that aims to transform carbon-heavy industries, starting with steel through a green hydrogen powered plant in Boden, announced the €190 million first close of a Series-B equity round.

It has secured a contract for renewable energy and has pre-sold 60% of its projected initial volumes of decarbonized steel to pipe and tube companies, makers of white goods, passenger vehicles and heavy trucks.

All it needs to do now is to get shovels in the ground and build the plant.

The equity round was co-led by new investors AMF, GIC and Schaeffler, the German supplier of rolling element bearings for car makers and industry, which is also a customer of H2 Green Steel. Schaeffler needs a long-term source of green strip steel to make its supply chains more sustainable.

The official notice of the deal contains no mention of any banks, but Morgan Stanley advised the company.

“Despite the uncertainty in global markets, a venture like ours, with both a strong business case and a strong sustainable purpose, is clearly attractive to investors,” states Henrik Henriksson, chief executive of H2 Green Steel.

It is a relief that, even during the public stock market sell-offs, closure of the IPO market and the private market down rounds, investors are still supporting capital-intensive new companies in sectors like this.

But this is not a closed shop.

“It is not just energy transition and software,” says Lumbroso. “There’s a broad spectrum of issuance in equity private placement markets from sectors such as healthcare, business services, financials, even consumer goods and real estate.”

CPI Property Group raised $300 million of equity at the end of last year through a placement to Apollo Funds. In May 2022, German car subscription company Finn raised $110 million of equity to finance its expansion into the US. This came after it raised asset-backed security funding through Credit Suisse at the end of last year.

In July, wefox, the German insurtech company, raised $400 million in a Series-D round led by Mubadala Investment Company that gave it a post-money valuation of $4.5 billion, up from $3 billion at its last round in 2021. Wefox has two million customers and hopes to reach three million by the end of this year, but the pitch to investors was a doubling of annual revenues, from $320 million last year to a targeted $600 million.

“Our model ensures we deliver a stronger financial profile with a clear path to profitability,” states Fabian Wesemann, founder of wefox and CFO. "This is vital at all times but especially in the current economic climate which demands greater financial discipline."

Beneath the headline deals, bankers say that executing private placements is a drawn-out process – at least as long as doing an IPO, sometimes longer. Issuers have to pre-sound potential investors. They need to see more to secure one or two well-regarded lead investors to set the price because the hit rate of eventual buyers is low.

And once lead investors submit draft terms sheets, there is lots of confirmatory due diligence.

This year, some companies have gone out expecting to raise straight equity and have had to pivot instead to structured deals.

Pre-sounding, agreeing leads, completing the fund raise – each step can take a couple of months.

As deals get bigger and more complicated, it is no surprise that investment bankers are taking a more important role from Series-B onwards.

“A company wouldn’t do an IPO or an M&A deal without a bank adviser and nor should they do these big equity private placements without one,” says Hutchings, "especially given the extensive due diligence and need to position the equity story.

"Banks have relationships with lead investors as well as with issuers and will play an increasing role in positioning companies with investors. Private placements are now a mainstream investment banking business that the coverage bankers need to be aware of. There are now bake-offs just as for IPOs.”

And for all the talk of dry powder, the capacity of investors has limits.

The memories of securing decent allocations at IPO by committing to late private rounds are receding. IPOs are rare anyway and many now fall below issue price and don’t recover. The promise of a sizeable allocation is not enticing. It may be that the belief that each round has to be at a higher valuation than the last with the IPO higher still is being cast off.

“To raise straight equity in private form, the bar is high,” says Thorneycroft. "Investors are clearly favouring best-in-class companies with a clear path to profitability, and the cost of that capital is significantly higher than it was. I am aware of a lot of mandates out there, but successfully completed deals are fewer."

Aside from valuation, another channel through which stress in public markets transmits to private capital raising is the proportion of assets under management (AuM) that crossover investors are allowed to commit.

As plunging public stock markets drag the value of AuM down, so the headline value of these marginal funds available for allocation to private deals also falls.

The private capital markets have suffered their own excesses and lessons have not always been learned: witness Andreessen Horowitz providing hundreds of millions of dollars in seed financing to Flow, the latest venture of Adam Neumann.

Five years ago, the former chief executive of WeWork managed to convince pre-IPO private investors that his shared office business should have a technology company valuation rather than a real estate one. That landed them, notably SoftBank, with heavy losses, even while the very earliest investors still made out.

Details of his next venture are sparse, but it seems to be about dormitory living for wage-slaves priced out of home ownership. Private equity is buying residential property at scale as prices fall in the US thanks to rising rates, as it once did trailer parks.

This is not exactly decarbonization and saving the planet.

Potential investors should study the boundary between Neumann’s private ownership of assets and the new company’s more closely than Horowitz’s avowal of how much “we love seeing repeat-founders build on past successes.”

WeWork achieved a private valuation of $47 billion in 2018, hoped to IPO at an even higher one in 2019 but failed miserably when investors looked at its financials and saw $47 billion of long-term lease liabilities set against $4 billion of rental income. The company admitted it might never be profitable.

After Neumann left, WeWork eventually went public through a Spac in October 2021. Since then, after an initial pop, its share price has fallen over 60% and its market capitalization at the end of August 2022 was $3.3 billion.

The era of quantitative easing and zero-cost financing distorted capital markets in extraordinary ways, including both the public and private equity capital markets. As valuations soared and yields vanished, investors took on all manner of new risks, including liquidity risk, in the search for alpha.

That era is over, but the adjustment is only just beginning.

In the decade after the financial crisis, all manner of new companies, most notably high-growth technology companies, began to stay private for longer.

It wasn’t so much that being publicly quoted lost its allure. True, young entrepreneurs are no longer driven by the desire to ring the stock exchange bell or present quarterly earnings. But that is still the endgame for many owners. They don’t hold private stock for ever: not even Warren Buffett does that.

Secondary sales of privately placed equity are only just starting to appear. When managers of six- or seven-year funds need to return cash to limited partners, the main two options are still a trade sale to a strategic buyer or an IPO.

The public stock markets also remain the source of an acquisition currency for future consolidation and an exit for senior employees who were paid in stock rather than cash through the build-up phase.

Over the last decade, flattered by their own returns and their capacity to raise new money, private investors got greedy. They didn’t want retail investors to capture all the upside in companies they had supported through the riskiest phases of starting and scaling up. So they held on longer and put off selling to the greater fool.

That ultimately led to the dramas of 2019: the poor performance of Lyft and Uber and the failure of WeWork.

Institutional public investors had already squeezed into late-stage private funding rounds in the hope of capturing some of the growth and, yes, obtaining a good allocation at IPO. But there was no juice left.

And that process extended all the way down the financial supply chain, with later stage private investors, more naturally suited to financing the scale-up of established companies, coming in soon after startup instead.

This was happening away from the $100 million-and-larger deals that the investment banks Euromoney speaks to tend to work on.

Gudmundur Kristjánsson is founder and chief executive of Lucinity, a company that provides artificial intelligence-powered compliance systems for banks and fintechs. He set the firm up in Iceland in 2019. In July, it completed a $17 million Series B.

Lucinity only seems to raise money in difficult times. Its Series A was in March 2020, the first month of Covid lockdowns, although it had just signed a first big client so it was straightforward.

It was back in the market in February this year when venture capitalists pulled back after the invasion of Ukraine. But the company needed to keep investing in the product and saw the chance to go to market, so it pressed on.

Kristjánsson, a former Citibanker, tells Euromoney he has noticed changes between the two funding rounds: “Last year, investors wanted to hear about four times, five times and six times growth. This year is more about sustainable growth and a plan for the path to profitability.

“We had previously noticed some investors that usually venture in rounds C and D looking to come into rounds A and B instead. That trend may have pushed up valuations last year.”

There may be many investors still looking to deploy their dry powder in private equity today, but most are back in their own lanes now.

“Public equity investors that were dabbling in private rounds to get ahead of an IPO have become a lot more cautious,” says Thorneycroft.

Along the fundraising journey, many of the tourists have gone.

“Investors were looking all across the spectrum, doing earlier rounds than they had previously in some cases, such was the competition for good assets,” says Gupte. “Today, investors are rightly being a bit more cautious and focusing on companies and sectors they have the highest conviction on.”

Most are focused within their old boundaries.

Now, at that opposite end of the journey from Lucinity, the pre-IPO stage, another dynamic is playing out. Investors are asking if the supposed liquidity that comes when a stock is floated on a leading exchange is a mirage.

“In Europe, illiquidity begins at quite a high level of market capitalization, for example at the lower end of the FTSE100,” Greg Bennett, chair of Appital and former head of capital markets for EMEA and the Americas at Fidelity International, recently told Euromoney.

Asset managers are having to source liquidity from each other. And this has potential consequences for IPOs.

“Even late last year, the IPO market was getting to a stage where the model was challenged in Europe because there wasn’t enough fundamental interest to cover a deal and follow through with it in the aftermarket,” says Hargunani. “There was therefore more reliance on shorter-term funds, which led to less momentum in bookbuilds and weaker aftermarkets.”

The result of poor aftermarket performance is liquidity drying up, especially in mid-cap equity, and the proliferation of so-called orphan stocks that break down below their IPO price and are all but abandoned by investors and analysts with little prospect of recovery.

Private markets are also illiquid, but they tune out market noise. If one or two large institutions take a positive long-term view on a company, they don’t have to worry whether or not the wider market shares it.

“If an investor believes in the equity story and the potential for a company to grow after a capital injection, then it can invest at a valuation it is comfortable with,” says Hargunani. “It doesn’t need other investors to believe in that story or that valuation in order to make a return as long as it has the ability to be patient.”

In the end, those investors will want to exit. But if enough private money is available through various structures to keep a company going and it has sufficient capital and earnings also to issue debt, then it can wait to hit the IPO market when terms are better.

“The 2022 IPO pipeline was a fantastic one with some great businesses already of scale. It was much better than the 2021 vintage,” one banker tells Euromoney. “I guess we’ll do most of them in 2023.”

Maybe.

Some of those companies that were ready to IPO have done big private rounds instead. Starling, the UK challenger bank, was looking to build an acquisition war chest this year. It has been profitable every month since 2020 and had completed a £325 million Series D in April 2021. It bought Fleet Mortgages, a buy-to-let specialist lender, last July. Bankers say it could have IPO’d this year. Instead, Starling completed what it calls an internal capital raise for £130.5 million. All of its existing investors participated.

Meanwhile, every leading stock exchange, most new digital exchanges and several of the largest investment banks are exploring ways to enable easier transfer and trading of privately owned shares.

Capital markets work in cycles and we have been through periods before and after the great financial crisis when private placements were hot.

In the run-up to Neuman’s failed WeWork IPO, there was much anguish about the declining number of companies quoted on stock exchanges; and the much smaller number of wealthy investors holding on to the returns generated by innovative new companies that transformed sectors while staying private for longer.

But the private equity market has grown to a new scale, maturity and level of institutional infrastructure. It doesn’t have the same visible volume of secondary market activity as the secondary buyout market with its dedicated funds. But it looks like the big dog now and the public equity market more like the tail.