Stock Markets Rebounded. So Why Aren’t Companies Going Public?

Companies may not “really feel comfortable going public over the next six months if they don’t have to.”

Tomohiro Ohsumi/Bloomberg

Tomohiro Ohsumi/Bloomberg

Companies are staying private for longer — a trend that the coronavirus pandemic will likely exacerbate.

The global spread of Covid-19 led to a dramatic reduction in new public listings in April and May, even as stock markets rapidly recovered from March’s crash. According to EY, the number of IPOs plummeted by 48 percent globally compared to the same period in 2019. The monetary value of IPO proceeds dropped even further, falling 67 percent.

This slowdown occurred despite a “backlog” of large, VC-backed companies that were expected to go public in 2020, according to Cameron Stanfill, venture analyst at PitchBook. While there have been some exceptions, like biotech companies, IPO activity overall has been “pretty depressed,” he said. “Not as bad as 2008, 2009 — but trending that way.”

Whether and for how long companies continue to delay IPOs remains uncertain, but a flurry of activity in June points to a resurgence in public listings over the second half of the year, according to EY.

“With stock prices rebounding and market sentiment improving, we are seeing signs of recovery in the IPO market,” Jackie Kelley, practice leader for EY Americas, said via email. “Over a third of the IPOs in the first half of 2020 occurred in June.”

As of the end of June, EY had tracked 419 IPOs globally in 2020 — a 19 percent decline from the first half of 2019. IPO proceeds, at $69.5 billion, were down just 8 percent.

“The IPO pipeline continues to build as issuers look to go public in the second half of 2020 or early 2021,” Kelley said. “Although IPO activity in U.S. presidential election years has historically tended to skew toward the first half of the year, recent market volatility could lead to more deals around the election than in years past.”

Still, continuing uncertainty around Covid-19 and its impact on the economy may dampen enthusiasm for going public in the near future.

“It’s easy to get optimistic given what we’ve seen in June, but I think there’s still some skepticism to be had about the true economic impact of the pandemic and whether companies will really feel comfortable going public over the next six months if they don’t have to,” PitchBook’s Stanfill said.

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For investors in venture capital funds, this may mean lower returns, as delayed IPOs lead to later exits and possibly additional cash injections from VCs to “bridge the gap” between now and when companies eventually go public, according to Stanfill.

“It seems to be exacerbating the private-for-longer trend,” he said. “Especially given that amount of capital that is available to VC-backed companies. That pool of capital is very large now and seems to be still pretty engaged in making deals.”

Kelley echoed this, noting that the “record amount of private capital available for deployment” has “resulted in some high-growth companies taking on significant private capital and delaying going public.”

This is seen in the overall numbers of IPOs, which were declining globally even before the pandemic hit, even as proceeds remained high. Still, Kelley noted that companies have continued to go public via other methods, including direct listings and SPACs, or special-purpose acquisition companies.

SPACs in particular are likely to play a larger role in the coming months, after a number of SPAC offerings in the first half of 2020.

“Despite the market crisis, SPAC offerings are on pace to meet or exceed the record set in 2019,” Kelley said. “These deals are larger and sponsors are higher-profile than we’ve seen. This should enhance the future viability of the SPAC path to the public markets for a broader swath of issuers.”