Rainmaker Securities Co-Founder Greg Martin joins Yahoo Finance Live to discuss SPACs and which IPOS to watch in 2022.

Video Transcript

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ALEXIS CHRISTOFOUROS: 2021 was a record year for the IPO market. So what can investors expect this year? Joining us now is Rainmaker Securities co-founder Greg Martin. So Greg, I guess the big question this year is, how long will the market window last for these companies coming to market, especially after a record year? I'm wondering if we have a little IPO fatigue.

GREG MARTIN: Well, thank you for having me. And it's a great question. It's interesting because at Rainmaker, we manage one of the largest trading platforms for private companies. So we get a real good lens as to what the future IPO market will be as these companies matriculate to the public markets.

And clearly, 2021 was a banner year in terms of number of IPOs. But the companies didn't trade so well after they went public. And of course, we're already seeing some substantial headwinds early on in this year as interest rates tick up, particularly for the sort of high-growth, more momentum plays that the tech sector represents.

And so it's going to be interesting to monitor because we've seen a pretty big pullback in the NASDAQ, even this week and certainly today. And so I think valuations will really be tested. But we do have a lot of very large companies that are good companies, growing well. And so I think they will be able to access the public markets this year. It's just a question of valuation and what the compression looks like when the interest rates are factored in. And so it'll be very interesting to see.

ALEXIS CHRISTOFOUROS: And we've got lots of big name companies expected to go public this year. Just a few here, Stripe, Klarna, Impossible Foods, Houzz. What are you most excited about and why?

GREG MARTIN: Yeah, I think we'd start with Stripe. Clearly, it's a bellwether company. It represents the next generation of payment infrastructure on the web. So it's a great play for e-commerce. And I think we all can see how e-commerce has grown during COVID. And certainly, it has a large TAM. And the company is being valued in the secondary markets as a private company at something between $150 and $200 billion. So that's a very hotly-anticipated IPO.

And they've been very secretive about what their plans are. But I think people expect them to go public this year. So that's certainly sort of the granddaddy that we're focused on because it's so large.

Some other interesting ones that you mentioned, Reddit obviously just filed their IPO. It was sort of one of the original gangsters in the social media space. It's taken a long time. They've had pretty significant valuations in the private markets. And so it'll be interesting to see how it trades as it kind of follows in the footsteps of Twitter and Facebook and Pinterest. So that's one that we'll see. And that one probably could come in the first quarter.

Another large software company, Databricks, has had close to a $40 billion valuation in the private markets. It's kind of following in Snowflake's footsteps as sort of a data processing software business. And as the rise of data occurs in the enterprise market, Databricks is currently handling about 40% of the Enterprise 500.

And Snowflake has continued to trade well, even despite some of the pullback in the market. And I think people will hotly receive Databricks when it comes public. And again, I think with all of these companies, it's just a question of valuation. We're going to see some compression, I believe, in multiples in the market as interest rates tick up because these companies are so sensitive to interest rates because they're really being valued on cash flows that are five-plus years out.

And so as interest rates tick up-- and I think Goldman just came out and said they anticipate maybe four rate hikes this year. And we're already seeing it in the 10-year. It'll be really interesting to see how valuations emerge as the year goes on.

ALEXIS CHRISTOFOUROS: And let's talk a little bit about how they're going to come to market because we know SPACs were sort of the way of choice for a lot of companies last year until appetite, I guess, started to wane towards the end of last year. And those SPACs outpaced traditional IPOs. Do you expect the same thing to happen this year? Might we see more direct listings this year versus last year?

GREG MARTIN: Yeah, that's a great question. I think there was a little bit of a SPAC frenzy that was a little bit faddish in 2021. I think that the market absorbed too many SPACs. And we've seen them trade down. We've seen a lot of SPAC and target acquisitions fall with significant redemptions at the de-SPAC.

So I think there will be a much smaller place for the SPAC IPO in 2022 and beyond. I think there is a place for it. I think they find companies that maybe don't go public the traditional way. But I expect to see a much greater percentage of IPOs this year being more the traditional way.

And I think we're going to have a little bit more difficult market. I do think that rising interest rates are going to raise the bar for companies to go public. It's going to, as I said, put pressure on valuations. And so I think I expect to see fewer SPACs. I expect to see much more scrutiny on the targets that they come with. And so I do think that that's going to be a much smaller percentage of IPOs this year.

As it relates to direct listings, I've said it in the past. There are companies that are just so good. They have such a great business, they're so well-covered already by investors that they can go public via a direct listing. We've seen those companies. And they've traditionally been successful not because they went public via direct listing but just because their businesses and their coverage in the market was already so good.

Stripe would be an example, Databricks possibly. I mean, these are great companies that I think could go public via direct listing. It may be that, in a more difficult market where valuations are a little bit more challenged, that they do prefer to use an underwriter and sort of get that marketing pop that you might get via a traditional roadshow. But I expect the direct listing to only represent companies that are of a greater quality. And I expect the SPAC market to be much less than it was in 2021.

ALEXIS CHRISTOFOUROS: All right. In the 30 seconds we have, once again, the NASDAQ had more companies go public than the New York Stock Exchange. You see that trend continuing?

GREG MARTIN: No, I don't. I think there's going to be a rush to higher quality companies in terms of current earnings. As I said, as interest rates tick up, I think there's going to be more of a premium put on current earnings. I think it's going to hurt growth and momentum companies. So I think only the best sort of momentum and growth companies are going to be able to go public. And there's going to be fewer of them.

And so I think that the NYSE, the New York Stock Exchange, tends to be more of a higher quality, lower growth but higher quality of earnings-type company. And so I actually expect New York to probably outperform NASDAQ this year.

ALEXIS CHRISTOFOUROS: We shall see. Greg Martin, thanks so much for being with us. We appreciate it. And that's going to do it for this special edition of "Market Movers," everybody.