Sluggish Year for IPOs, But Signs Abound of Post-Election Surge
Uncertainty surrounding this year’s presidential election has kept U.S. IPO activity at a sluggish pace—so sluggish, in fact, that this year could end with the fewest IPOs and the lowest level of capital raised since 2009, according to PitchBook data for the first nine months of 2016.
But this is no time to trash talk the IPO market, according to Kathleen Smith of Renaissance Capital, a Greenwich, CT, firm that manages IPO-focused Exchange Traded Funds. The institutional research firm is predicting a surge of IPOs in the weeks and months to come.
Smith anticipates a flurry of IPOs between Thanksgiving and Christmas, even though companies and their IPO sponsors typically avoid IPO road shows around the holidays.
“Don’t let this currently slow IPO market fool you,” Smith said by phone Monday. “There is a lot of power underneath… There is a huge list of companies getting ready to go public. Huge.”
Smith estimates that more than 200 companies are preparing to go public in the next year or so, including many that have filed their IPO registrations confidentially. The parent company of Snapchat, for example, has submitted its IPO documents confidentially, according The Wall Street Journal. Citing undisclosed sources, the Journal reported last week that a Snap IPO expected as early as March could value Snapchat at somewhere between $20 billion and $25 billion.
Through the first three quarters of 2016, PitchBook counted only Nutanix and Twilio as “unicorn” IPOs—private companies valued at more than $1 billion. But Smith said Snapchat has broken the dam for unicorn deals. Amid the flood of deals to come, Renaissance Capital sees signs that Uber, Airbnb, and Palantir plan to go public in early 2017, and all three would rank as big unicorn deals.
Prospective tech IPOs include Expedia spinout Trivago, based in Dusseldorf, Germany, and Optiv, a Denver, CO-based cybersecurity company. Potential life sciences offerings include San Diego-based AnaptysBio and Cambridge, MA-based Visterra. Both companies have updated their IPO documents in recent weeks. “They wouldn’t be updating their financials if they weren’t planning on going public,” Smith said.
“If you just look in the rear-view mirror, and just look at the IPOs that have taken place so far this year, you would be negative,” Smith said. But Renaissance Capital estimates there may be as many as 250 companies that are preparing to go public in the weeks and months to come. “If you look at the [IPO] returns for this year, and what’s being lined up and ready to go, the real question is whether there’s enough Wall Street manpower to manage all the deals.”
Through the first three quarters of 2016, Seattle-based PitchBook has counted just 49 private equity and venture-backed IPOs, which have raised a total of $7.94 billion. That’s down almost 50 percent in both categories from the same period in 2015. “We don’t know if that will be the case yet for the rest of the year,” said PitchBook senior analyst Nizar Tarhuni. “Our report is only based on completed filings, and we did see an uptick in October.”
PitchBook counted seven private equity and venture-backed IPO filings in October: Everspin, a computer technology company in Chandler, AZ; iRhythm, a digital health technologies company in San Francisco; Obalon, a medical device company near San Diego; Ra Pharmaceuticals of Cambridge, MA, Quentenna Communications of Fremont, CA; Coupa Software of San Mateo, CA; and AquaVenture Holdings, a utility sector company in Tampa, FL.
Both Tarhuni and Smith attributed this year’s IPO slowdown to uncertainty surrounding the presidential election. With the election of Donald Trump, “people have digested the information, and people are ready to assume that risk,” Tahuni said. “If it’s time for that company to move, the sponsors are going to want to move.”
At Renaissance Capital, which counts all IPOs (not just private equity and venture-backed deals), the tally so far is 97 IPOs, with total capital raised of $17.3 billion—down about 42 percent in both deals and dollars from last year.
“It’s the slowest issuance levels since the financial crisis, since 2007-2008,” Smith said. But issuance levels are historically lower during presidential election years, according to Renaissance Capital data. If not for the election uncertainty, Smith said IPO activity this year would have been much higher, as market conditions have been excellent.
According to Renaissance Capital data so far this year, the average for post-IPO returns has been 30.8 percent, with an average first-day gain of 12 percent in IPO trading. IPOs so far this year also have been priced at 6.6 percent below the midpoint of their proposed pricing range. Smith concluded, “They’re being priced reasonably and the returns are good.”
In addition, Smith said President-elect Trump’s proposed reductions in the corporate tax rate “really helps these small-to-medium companies that are preparing to go public.”