Is the capital markets slump about to end?

Receive free Capital markets updates

We’ll send you a myFT Daily Digest email rounding up the latest Capital markets news every morning.

Despite the folksy wisdom, it isn’t darkest before the dawn, unless you have a weird definition of what dawn is. It is typically coldest before the dawn, which is a workable but somewhat less poetic substitute.

Anyway, here are some Morgan Stanley charts:

Venture activity has undergone its “[l]argest peak to trough swing in history”, writes analyst Edward Stanley. And, based on historical trends, he says we may be in the, uh, coldness before the dawn:

If Q4 were to be a trough in IPO and public market secondary activity, 5 prior cycles over nearly 3 decades suggest a strong recovery in 2024/25. In this scenario, 4Q24 average deal volume and value would be up 90% and 160% respectively from the lows; by 4Q25 these figures could rise to 100% and 240% respectively. Of course, while we have had a number of recent IPOs which have generated optimism in the market over prospective exits, it is too early to say if a new regime is starting.

If the light is in sight, it’s after a particularly painful crunch:

If we look at the current downcycle versus prior cycles, the current cycle is past the average in terms of months of new lows in deal value and volume versus prior peak. Value of transactions has fallen more than volume, but in either case at this point in the cycle, the 2022 cycle is worse than any other for which we have data in the last 3 decades.

Here’s how those words look as squiggly lines:

So, is a comeback (soon to be) on? And, if so, what can history tell us about this possible future?

MS says IPO and secondary market activity tends to rally for about three years on average, versus the 28-month average drawdown period that’s just been passed. Here’s what Stanley (Edward, not Morgan) projects:

He continues:

Adding further granularity to the above analysis, the value of IPOs and secondary deals tend to rally and fall by a ratio of 2:1 from trough and peak respectively vs deal volumes. In this current cycle, the combined value of IPOs and secondaries have fallen c72% relative to deals falling by c50%.

These potential trends are all very well, but time is rarely a totally flat circle. Alphaville got on the phone to Stanley, who said there’s a “clearly very different backdrop to this market reopening versus previous ones”.

He noted one of the biggest dangers to the 2024 comeback thesis is that the IPO rush of late 2020 and early 2021 involved a strong effect of pulling forward — meaning many of the companies that might have been expected to go public in the next cycle have already done.

The other danger he highlighted is about expectations management for the zero-interest-rate-era “unicorns” who face a wake-up call on their valuations:

If you look at the [roughly 1,400] ‘unicorns’, that number must be wrong. Because 44 per cent of those companies’ [valuations] came from raises when interest rates were zero. And they haven’t been revalued since.

So, the near-term future of capital markets might rely upon banks convincing tech leaders they’re not as great as they think they are. We’re not holding our breath.