INITIAL PUBLIC OFFERINGS
THE REBOUND IN THE IPO MARKET
Expect a rebound for the initial public offering market (IPO) in the second half of 2017 after stumbling last year amid rising volatility in stocks, presidential election jitters and a public-private valuation disconnect for tech companies.
After a volatile 2016 which sidelined many prospective IPO’s we expect a more normal IPO market in the second half of 2017, as volatility in stock markets is expected to continue to settle back towards more normal levels, assuming of course that markets behave.
Last year saw 105 IPOs in the U.S., the fewest since 2009 and down from 170 in 2015. Dollar volume totaled $18.8 billion, the lowest since 2003 and down from $30 billion in 2015.
The biggest U.S. IPOs last year were executed by Chinese logistics company ZTO Express, raising $1.4 billion; retirement- service company Athene Holding, $1.1 billion; and real-estate investment trust MGM Growth Properties, $1.1 billion.
The Standard & Poor’s 500 index plunged 11 percent from the start of the year through February 11, hurt by economic weakness overseas, particularly in China. After rebounding for a few months, stocks skidded again after the U.K. voted to exit the European Union in June.
Stocks then bounced back, only to slump on pre-election anxieties.
The IPO market typically lags the performance of public indexes as Investors don’t want to buy companies without a track record if they’re losing money on companies that do have one.
Over the past two years there has been a considerable drought in technology IPO’s, long seen as the major support for the IPO market, as there remains a large discrepancy between the public and private view on valuation.
This means that high valuations in private funding rounds can’t be matched in the more skeptical public markets.
This disconnect can only be remedied by Venture Capital investors holding back on selling to the market to season their investments and over the longer term by organic growth in tech companies justifying high private valuations.
The disconnect isn’t con ned to public markets as less mature companies can’t access capital easily in private markets anymore. Whilst it’s no problem for large and well-known brands, such as Snap or Uber, it remains dif cult for the large majority of other lesser known companies to raise capital.
Interestingly enough, in 2014 – ‘15, some shied away from going public because it was so easy to access capital while staying private.
Another factor dampening IPO activity in 2016 was the red-hot mergers-and-acquisitions market. Several companies that led for IPOs in 2016 or were considered strong candidates for 2017 took advantage of the robust M&A market to sell themselves, pursuing a quicker path to liquidity. These companies include payment processor TransFirst and security software vendors Blue Coat Systems and Optiv Security, all of which had led for IPOs.
Other factors point to a sunnier Q3 & Q4 in 2017 for IPOs. While IPO volume slumped last year, the performance of IPO stocks was strong. The average return of 2016 IPOs from offering price through year-end was 26 percent, the strongest since 2013, and that’s a very big reason for optimism about IPOs this year.
Many IPO market participants also expect the stock market to remain stable or rise, providing a positive backdrop for IPOs.
And then there’s President Donald Trump.
Trump’s growth agenda may create a much more favorable overall IPO environment, given Trumps plans for infrastructure spending, corporate tax reform, and nancial deregulation.
Several trends will nudge venture capital and private-equity-backed companies to publicets, including; increased investor selectivity and risk management, self-correction of valuations, a decline in capital for mega [private] rounds, and aging Venture Capital and Private Equity holdings.
Some companies and their early investors will look forward to the possibility of getting higher public valuations than their last private ones. That was the case of payment processor Square, which went public in 2015.