By: Scott Coyle, CEO
The IPO market is cyclical. Fluctuations in the supply/demand ratio of deals and megadeals in the pipeline are influenced by a myriad of factors, including stock market stability, regulatory changes and global economic and political shifts.
Last year was particularly punishing for the IPO market. For mature startups on the cusp of going public in late 2015 and 2016, staying private longer was an attractive option due to a still-shaky stock market, policies that make it tougher and riskier to go public, and the uncertainty around political developments like Brexit and the 2016 presidential election. Companies fearful of a low IPO price valuation took more time to capitalize on additional funding rounds in the private market last year, where their valuations were higher than they would be in the public market.
As a result, the IPO market experienced record lows across many industry benchmarks in 2016. In terms of total deals and proceeds, it was the slowest year for IPOs in the U.S. since the global financial crisis in 2009. According to EY’s 2016 Q4 Global IPO Trends report, only 112 IPOs were completed, resulting in a 36% decrease in deal volume compared to 2015. Capital raised was also down by 37% in 2016 compared to 2015, coming in at $21.3 billion. For the first time since 2000, the U.S. was absent from the top ten global deals of the year.1
Looking further back, 2015 began with optimism for the IPO market, with 74 deals in the first half of the year. Although down from the same period in 2014 – a year in which the IPO market surged – there was a sense of cautious optimism that 2015 would pick up.2 But market volatility rose during the second half of the year, jolted by interest-rate speculation, poor performance from IPOs that priced in first and second quarter, as well as hits the worldwide economy took from Greece’s debt default and a plummeting stock market in China.
I expect that other deals on the IPO horizon will follow Snap’s lead in thinking of ways to reduce the risk of “IPO Flippers”
Fast-forward to the first quarter of 2017: Pent-up demand, the anticipation of favorable policies and tax breaks, as well as the successful debut of the much-anticipated Snap IPO, have set the stage for an active year ahead. In addition, sustained market strength in combination with a large supply of venture capital backed companies in need of a liquidity path, could tip the scale in favor of public offerings over private exits or financings.
Despite it being a lackluster year in terms of deal volume and proceeds, companies that went public in 2016 ultimately performed well – trading 17.6% above their initial prices as of December.1 Now that market conditions are much more favorable, this trend could continue in 2017 and beyond.
Investors are eager to see AirBnB, Uber and a backlog of tech companies make their IPO debut in 2017 and 2018. As of March 31, 24 IPOs have been launched, as well as 100+ Secondary Offerings in which already-public companies offer new stock for sale.3
Snap, the biggest tech offering since Alibaba in 2014, may have set an important precedent that will protect share price and therefore reduce market volatility in the future. On February 27, Snap announced that about 50 million shares, approximately 25% of their total offering, would be subject to a yearlong lock-up agreement.4 In doing so, Snap is attempting to make sure shares are in the hands of long-term investors. A lock-up agreement is a way to ensure investors have a longer time horizon. Issuers are interested in placing their IPO shares in the hands of long-term investors because it reduces supply, giving their stock price a better chance of trading higher.
I expect that other deals on the IPO horizon will follow Snap’s lead in thinking of ways to reduce the risk of “IPO Flippers” – i.e., investors who plan to sell their IPO shares within the first 30 days of trading regardless of the price, causing downward pressure on the share price. Traditionally, 80% of an IPO allocation goes to large institutional investors, while the remaining 20% is allocated to well-connected investors. While some of these investors are good customers of the underwriter, many of them have a business model based around “flipping,” or selling their shares immediately regardless of price.
ClickIPO will release an app in second quarter 2017, which will open the door to investors who have not had access to IPOs and are willing to buy and hold IPO and Secondary Offering shares. The app includes a scoring system designed to eliminate most of the share flipping risk, offering unparalleled transparency and bottom-line benefits for all stakeholders – from the issuer to the underwriter to the broker-dealer to the individual investor. The ClickIPO app will be the go to source for information in regards to the IPO and Secondary Offering markets.
I am cautiously optimistic about the balance of the 2017 IPO market. With a pipeline of companies ready to enter the public market, the preliminary success of Snap, as well as ClickIPO’s game-changing technology, the IPO industry is poised for a much-needed upswing.
- EY, Global IPO Trends, Q4 2016
- Harvard Law School Forum on Corporate Governance and Financial Regulation, 2016 IPO Study, March 23, 2016
- Business Insider, “Some of Snap’s new investors won’t be able to sell the stock for a year,” Feb. 27, 2017
Risk of Investing in Initial Public Offerings (“IPOs”)
There are specific risks in investing in an Initial Public Offering (“IPO”). Among other things, the stock has not been subject to market valuation. Those risks are described at length in the prospectus, and we urge you to read the prospectus carefully to understand those risks before investing. An IPO is the first sale of stock by a private company to the public and may not be suitable for all investors. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. IPOs are a risky investment. For even experienced investors, it can be difficult to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values. Read more information regarding the significant risks associated with investing in IPOs.