IPO Lawyers See Cornerstone Investors Boost Deals in Slow Market

Lawyers confronting a sluggish market for initial public offerings are helping companies turn to cornerstone investors to buffer the risk of going public.

Such investors allow their names to be published in a prospectus ahead of an IPO in exchange for an allocation of shares. For those committing the money, the early access can allow them a larger allocation at a lower value.

There were cornerstone investors in “just about every large IPO in 2023,” said Daniel Forman, a capital markets partner at Ropes & Gray. Those backers will remain important as the IPO market gains momentum, he said.

Lawyers are optimistic they will begin to see an increase in initial public offerings by 2025 after a decade-worst drop last year. Reddit Inc. on Feb. 22 filed for an IPO that is set to be one of the biggest listings of the year.

BrightSpring Health Services Inc.'s January IPO raised more than $690 million and CG oncology Inc.'s offering the same month collected $435 million, according to Bloomberg data.

“The pipeline is deep across industries,” said Ian Schuman, global chair of Latham & Watkins’ capital markets practice. “Consumer retail and tech—you will see some big names come out. Energy and infrastructure will be the most robust in terms of overall growth.”

Big Law practices would like IPO work to help fuel demand for billable hours that according to a Wells Fargo & Co. survey are expected to grow by about 3% this year. Firms last year had to rely on counter-cyclical practices such as litigation and bankruptcy to drive demand that rose by only 1%, according to Wells Fargo’s legal specialty group.

Company chief executives last year delayed plans for IPOs in the face of low valuations, high borrowing costs and difficult macroeconomic conditions. The $91.7 billion worth of IPOs in 2023 was the lowest in at least a decade, and the number of transactions—1,430—was the lowest since 2013, according to Bloomberg data.

Law firm IPO shops kept busy by helping clients prepare to go public through steps such as building out financial reporting functions and hiring advisers.

Cornerstone investors first began to emerge as strategic partners to an IPO around six or seven years ago, Schuman said. They picked up steam after the Securities and Exchange Commission allowed for companies and institutional investors to collude when filing IPO registrations in 2019.

The cornerstone investors have become a helpful tool to increase confidence in deals, Schuman said. “The emergence of the increased frequency is in part a function of trying to de-risk some of the deals in a weaker market,” he said.

Companies that go forward with cornerstone investors benefit from the confidence of support from partners in their IPO—and big names backing them could encourage other potential investors to pay attention to the offering.

Chip designer Arm Holdings Plc’s IPO last September valued at $54.5 billion was the largest of 2023. The British firm lined up major clients as cornerstone investors, including Apple Inc., Nvidia Corp. and Alphabet Inc., ahead of going public.

Pushing Ahead

One reason companies may push forward with a public offering despite muted valuations and macro difficulties is to appease investors who need liquidity and are unwilling to wait for the markets to ease.

“The owner of the company is going to be the real deciding factor in whether the company goes out into a capital raising event or not,” said Rachel Phillips, a capital markets partner at Ropes & Gray.

On a whole, investors, including those in venture capital and private equity, are patient, Schuman said. They may instead choose to avail debt or diversity into secondary trades in the private market to gain more time. “There are other ways to gain liquidity or gain some return on capital,” he said.

Despite the slowdown in IPOs, biotech, health and energy companies have supplied some transactions.

“Life sciences will always be a robust industry from the perspective of capital markets,” Schuman said, because the companies require capital to fund their operations. Life sciences companies often need capital to reach research and development milestones, especially in growth stages, he said.