The initial public offering market stumbled last year amid stock market volatility, presidential election jitters, and a public-private valuation disconnect for tech companies. But market participants expect a rebound in 2017.
Last year was an aberration because of the way the stock market behaved, says David Erickson, a senior fellow and lecturer in the finance department at the University of Pennsylvanias Wharton School and a former co-head of global equity capital markets at Barclays. For 2017, I would expect a more normal IPO market, assuming 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 & Poors 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, Erickson says. Investors dont want to buy companies without a track record if theyre losing money on companies that do have one.
All that doesnt explain what Renaissance Capital, an IPO research firm and money manager, calls in a recent report the 800-pound gorilla still in the room: the two-year drought in technology IPOs, the bread and butter of the market. It is our long-held opinion that the primary reason for the lack of tech IPOs is the public-private disconnect on valuation.
That means frothy tech valuations in private funding rounds cant be matched in more skeptical public markets. The tension between public and private, writes Renaissance, can only be remedied by VCs caving into their growing urgency to sell aging vintages in their portfolios, or by time as companies grow enough to justify their lofty private valuations.
The disconnect isnt confined to public markets, Erickson notes. Young companies cant access capital easily in private markets anymore, either. Its no problem for a Snap or an Uber, he says. But for a company that isnt of that ilk, it might be hard to raise capital. If the IPO market isnt that great, the private market isnt that great either, especially for late-stage companies.
Interestingly enough, in 201415, 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 filed 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, says Michael Zeidel, a corporate finance partner at law firm Skadden, Arps, Slate, Meagher & Flom. These companies include payment processor TransFirst and security software vendors Blue Coat Systems and Optiv Security, all of which had filed for IPOs.
Other factors point to a sunnier 2017 for IPOs. While IPO volume slumped last year, the performance of IPO stocks was strong, says Carter Mack, president of JMP Group, a San Franciscobased investment banking and asset-management firm. The average return of 2016 IPOs from offering price through year-end was 26 percent, the strongest since 2013, says Renaissance Capital. Thats a reason for optimism about IPOs this year, Mack says.
Many IPO market participants also expect the stock market to remain stable or rise in 2017, providing a positive backdrop for IPOs. And then theres President Donald Trump. While the IPO market may continue to experience short-term volatility, until he sets legislative and economic agendas, Trumps pro-growth agenda may create a much more favorable overall IPO environment, Zeidel says, citing infrastructure spending, corporate tax reform, and financial deregulation.
Several trends will nudge venture capital and private-equity-backed companies to public markets, says Renaissance: increased investor selectivity and risk management, self-correction of valuations, a decline in capital for mega [private] rounds, and aging VC and PE vintages.
Some companies and their early investors will have to accept the possibility of getting lower public valuations than their last private ones. That was the case of payment processor Square, which went public in 2015. Companies are willing to take the risk that their stock will trade up in the future, JMPs Mack says.
Major companies expected to issue IPOs this year include Snap, which owns popular mobile application Snapchat; music-streaming company Spotify; and Brazil-based JBS Foods, the worlds largest meat processor.