For those who try to predict the future, the last two years have been a challenge. This is especially true when attempting to forecast IPO activity and emerging federal and state regulations, including pending U.S. Securities and Exchange Commission (SEC) rules.
Nevertheless, next year is starting to come into focus. There are some clear, positive signals in the IPO market, and I expect some major news from the SEC (hint: related to ESG). Generative AI and cybersecurity are two other areas where I also expect exciting developments. Here’s a quick look at how I think the year will unfold.
The Return of the IPO
Midway through 2023, DFIN’s “The IPO Readiness White Paper” touched on the IPO drought and the opportunity it created for businesses to better prepare for the amplified scrutiny and accountability that comes with being a publicly traded company. The pre-IPO companies that seized this opportunity to invest in sophisticated technologies that improve processes, transparency, and compliance will be well-positioned to act when the IPO window opens.
And there are a few reasons to be optimistic about the 2024 IPO market. First, although the performance of recent listings has been bumpy, there were quite a few significant, high-value IPOs in the second half of the year. These include ARM, Instacart, and Birkenstock, which created a bit of hype. The IPO pipeline continues to build while IPO-focused conversations and RFP activity are gaining momentum, and confidential filings are gradually increasing. Add it all up, and there are strong expectations that many will publicly file in Q1 2024.
On the private equity side, firms are looking to exit their portfolio companies and are considering a dual-track sale process, while IPO candidates share an openness to accepting valuation resets as they come to terms with the new normal. And let’s not forget the efforts of the Federal Reserve and its work to reduce inflation. Their actions are having the intended effect.
When you add all these factors up, the businesses that conducted their due diligence over the past year and have both strong growth potential and positive cash flow will be ready for a successful listing in 2024.
ESG Regulation Crosses the Finish Line
2023 was a busy year for the SEC, which, among many things, passed the Financial Data Transparency Act (FDTA). The FDTA ushered in the long-overdue transformation in financial data regulatory reporting and compliance and set the stage for growing AI adoption (which I’ll address later.) As for the long-anticipated announcement of the Commission’s new climate disclosure rule, the business and financial communities continue to wait.
But we shouldn’t be holding our breath much longer. While the SEC finalizes its plans, other entities are taking action. In the State of California, Governor Gavin Newsom confirmed his intent to sign the Climate Accountability Package that was recently passed by the Legislature. This effort at the state level will likely provide the final push for the SEC to pass its new climate disclosure rule, if not in the waning weeks of 2023, then early in 2024.
And for those who still doubt the future of ESG in the United States, simply look across the pond to our neighbors and business partners in the European Union (EU), who have led the way in implementing and promoting ESG standards and practices globally. Organizations of all sizes and maturity levels doing business in the EU (that includes US-based companies) must achieve compliance and transparency in ESG practices or face harsh penalties, reputational damage, and the risk of losing investor dollars. Taking ESG seriously is good for business and good for the planet.
Cybersecurity Drives Regulatory Compliance
Also, on the regulatory front, this year, the SEC adopted final rules requiring the disclosure of material cybersecurity incidents; while on the state level, the New York State Department of Financial Services (NYDFS) proposed amendments to expand the cybersecurity event notification requirement.
As other regulations follow and effective dates kick in, businesses will strive to stay ahead in 2024 by implementing technology-driven strategies that integrate cybersecurity throughout the organization. In addition to ferreting out malicious activity, these moves will allow businesses to ensure compliance with state and local regulatory requirements, which is essential to doing business in those jurisdictions.
AI Initiatives Become Essential
I mentioned the FDTA. What I didn’t touch on is how it is standardizing the use of open data. This standardization, paired with the desire to increase agility and innovation and enhance customer service, will drive significant AI adoption in 2024. That includes Generative AI.
But businesses will not dive in blindly. Guided by President Biden’s recent Executive Order on safe, secure, and trustworthy AI, they will spend time forging their AI strategies and ensuring a safe approach that aligns with company objectives while taking important ethical considerations into account. They will look to create a framework for Responsible AI governance with clear guidelines and principles for AI use, deployment, product development, and monitoring.
Predictions are challenging, especially in times of change. But given the regulatory, market, and technology outlook, I predict 2024 will be an exciting and prosperous year.
