Recently, I moderated our first quarterly Wall Street Revealed webinar with special guests Grant Miller, Managing Director, Head of Equity Capital Markets, Cowen and Company, and Matthew Perry, Portfolio Manager, BVF Partners, L.P.
While we covered a host of topics related to the webinar’s theme – “A View of the Current Healthcare IPO Market” – one of the meatiest parts of the discussion (and a topic that drew many questions from webinar participants) was on the definition, value and purpose of “test-the-waters” meetings.
These meetings are made possible as an outcome of the JOBS (Jumpstart Our Business Startups) Act, which – according to the Securities and Exchange Commission – permits an emerging growth company to engage in oral or written communications with potential investors that are qualified institutional buyers or institutions that are accredited investors, either prior to or following the date of filing of a registration statement. In short, private companies are now able to meet with potential investors before filing to go public. As Matthew Perry emphasized during our webinar, “I love test-the-waters meetings. Every single CEO, board member and management team should use them to know what their company’s IPO is going to be like well before the IPO is booked and filed.”
Unless you’ve been stranded on a distant planet, you’ve noticed that equity markets have been hitting new highs lately, and that’s been accompanied by an increasingly robust capital markets environment, even including initial public offerings (IPOs). In fact, the current public healthcare IPO backlog stands at 14, with many more companies already confidentially initiating plans to pursue going public over the remainder of the year.
As recently as six months ago when we would meet with CFOs and CEOs of private companies (or their venture investors), they would have long lists of reasons why their company would never go public. The reasons included cost of capital, the hassle of being a public company, legal requirements, and compliance costs. All of these are particular burdens for smaller companies. In addition, if executives or investors were looking for an exit, they calculated better valuations if they sold to a strategic acquirer or private equity firm. An IPO was truly an option of last resort. Today, when we meet with these same constituents, we see a dramatic shift in their attitude towards going public.
Changing Tides for Healthcare Companies
So what has changed? The overall equity markets are much stronger, IPOs are getting done and trading up in the aftermarket and sentiment from the buy-side has become much more favorable. Some of this positive change has to be credited to the federal JOBS Act—a series of measures that allows private companies to become public in ways that are less burdensome and less costly.