IPO Drought May Soon Be Over

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Written by Slice Capital’s Aren Raisinghani.

After a seven-year low in Quarter 1 of this year, investors believed that the United States IPO pipeline would run dry: a mere eight health-care IPOs raised only $700 thousand combined. Quarter 2 restored some faith, bringing 33 IPOs and raising $5.5 billion. Although this activity is still far below average, 2016’s average return for IPOs is approximately 17% more than the IPO price — comparatively, 2015’s IPO class is down 11%. Kathleen Smith, a principal at Renaissance Capital, stated that the “17% return is very strong, and it’s even higher if you take out small IPOs … [w]hen the IPO market shuts down for long droughts, the market revives when we see a strong rate of return.” Smith expects more offerings in the pipeline, but does not expect 2016’s activity to reap the number of offerings or money raised in 2015, 2014, or 2013.

Much of the drier IPO climate is due to companies staying private for much longer — as long as they are able to get funding. Greg Brogger, CEO of Sharepost, stated, “The public market is not always a friendly place to be. The strong private companies will stay private because they can … [c]ompanies want to stay private longer and get larger, with more predictable earnings, before coming public.” A primary reason for this behavior is that the private market continually increases valuations for startups, and technology companies are hesitant to go public with a lower value when appealing to more selective public-market investors.

As of July 27, 2016, only three venture-backed technology companies went public (Acacia Communications, Twilio, and Impinj). They raised $346.3 million combined; comparatively, 12 companies went public and raised $1.8 billion in the same period of 2015. This trend is causing startups to opt to use private-market platforms, such as the Nasdaq Private Market, to offer liquidity. In the first half of 2016, preferred stock — typically held by venture capitalists and institutional investors — made up 45% of shares that changed hands on the platform. In this same period, $544 million in stock was exchanged on the platform — a 136% increase from the first half of 2015.

While the IPO market had a slow start to the year, some experts believe the tech market IPO is positioned for a resurgence in September. As of August 12, 2016 there are six tech IPOs — and those that approached the market performed well. This strong tech IPO performance has garnered the interest of hedge funds that are looking to invest in the hopes that they will reap the short term gains that Twilio and Line — a tech company that recently went IPO — posted. Bankers are advising companies in a position to launch to go public. Whether tech companies heed their advice is another story — only time will tell.

Sources Cited:

· (Bloomberg, 07/27/2016)

· (Business Insider, 08/12/2016)

· (Investor’s Business Daily, 08/06/2016)