Offerings That Have Come to Market Have Delivered Strong Returns
A flurry of initial public offerings this quarter made September the most active month for U.S. IPO pricings this year. Despite this recent spike in offerings, overall, the 2016 U.S. IPO market has been extremely disappointing and is on pace to produce the lowest level of offerings and proceeds since 2009 during the depths of the financial crisis.
Through September, there have been 75 U.S. IPOs that have raised $12.3 billion in proceeds, both figures represent a drop of almost 50 percent from the same time in 2015. The 101 IPO filings through the first nine months of the year are just over half the level of a year ago. Barring a dramatic and unforeseen surge in IPO activity, the U.S. market is likely to experience the lowest level of offerings, proceeds and filings in seven years.*
Through Q3, U.S. IPOs have averaged $164 million in size, approximately the same as 2015 and smaller than all but one year (2010) over the past decade. This trend can largely be attributed to the JOBS Act, which allows companies with less than $1 billion in annual revenue to forego some of the more stringent filing requirements when registering their offerings. These more lenient rules for emerging businesses, enacted in 2012, have played a major role in the success of bringing smaller offerings to the IPO market.
“Despite the strong returns of the average 2016 IPO and the strong investor appetite for technology offerings – as evidenced by Twilio’s soaring three-month performance – Uber, Snapchat, Airbnb and the other major tech-unicorns appear no closer to moving ahead with an IPO. That’s because conservative pricings have been a key component of 2016’s strong returns and the terms that unicorns agreed to in their multi-billion dollar private valuations make a conservative pricing a non-starter. Many of these private funding rounds came with a “ratchet” provision that guarantees investors additional shares of the company if an IPO prices below their agreed upon valuation. Last year, Square Inc. had to give investors an additional $93 million in shares to make good on such a provision,” said Lee Duran, Partner in the Capital Markets Practice of BDO USA. “If IPOs continue to deliver strong returns, thereby enabling offerings to be priced more aggressively, and unicorns begin to grow into their valuations, there is a reasonable chance we may see some move forward with offerings in 2017. But it will be a few mustangs, not a full stampede.”
For the fourth consecutive year, the healthcare sector is leading all industries in the number of offerings brought to market, accounting for 45 percent of total IPOs in 2016. The technology (18 percent) and financial (13 percent) sectors are running a distant second and third through Q3. No other industry has reached double digits in offerings this year.
“After experiencing excellent years in 2013 and 2014, the U.S. IPO market began to slow considerably during the second half of 2015 and almost came to a virtual halt during Q1 of this year. After some stops and starts during the Spring and Summer, we’ve seen a burst of activity as the third quarter came to a close, which bodes well for a strong start to Q4,” said Paula Hamric, Partner in the Capital Markets Practice of BDO USA. “The most positive factor of the 2016 U.S. IPO market has been the strong performance of those businesses that have taken the plunge, which reflects strong investor demand for quality offerings. Should IPOs continue to deliver robust returns for the remainder of the year, the market will be well positioned for a strong recovery in 2017.”
Q4 Forecast
Should returns remain positive for the remainder of the year and the overall stock market remain strong, 2017 could see a major recovery for U.S. IPOs and maybe even the sighting of some unicorns in the public markets.
This article originally appeared in BDO USA, LLP’s “Quarterly Insights” newsletter (Fall 2016). Copyright © 2016 BDO USA, LLP. All rights reserved. www.bdo.com
