Higher Rates Drive Companies to Equity Markets

For years, there have been hints from members of the Federal Open Market Committee (FOMC) that a rise in interest rates was necessary and imminent. Finally, on December 17, 2015, the Federal Reserve raised rates for the first time since 2006, with expectations that future tightening will be gradual. This move points to a strengthening U.S. economy, as growth in China improves and European markets stabilize.

Since the interest rates were dropped down to almost zero in December of 2008, we have seen a volatile reaction from the markets following every shift in monetary policy, every Fed press conference or release of the FOMC's meeting minutes. Now that rates have been raised, one of the looming questions on people's minds is what does all of this mean for the IPO markets in the New Year? And what sectors might be most affected by this rake hike?

Liquidity is Shrinking, Paving the Way for Unicorns to IPO According to data collected by Ernst and Young, 2015 recorded the most M&A activity since highs reached in 2007 and private equity was up 3% compared to levels reached in 2014. This alternative source of capital affected the number of technology companies that went public in 2015, a sector that experienced a 47% decrease in deal numbers in 2015 and a 27% decrease in proceeds as compared to levels reached in prior years.

Overall, the pipeline of companies looking to go public in 2016 should not dip because most organizations have been preparing for the shift in monetary policy for some time. In fact, according to a recent report by CB Insights, 2016 might be the year when bigger, more stable companies - often referred to as unicorns, which are privately held companies carrying valuations in excess of $1 billion - are forced to IPO in order to access capital for growth. For example, under the Fed's quantitative easing program, it has been cheap for these types of companies to fund their growth through capital from hedge funds, private trusts and investors that are chasing yield. But, with the interest rate hike, liquidity will begin to dry up and companies will be forced into the public markets to fund growth, especially unicorns.

Financial analysts remain concerned about an increase in private companies going public in 2016, especially within the tech sector, due primarily to the lackluster performance by the tech companies that listed this year. Etsy, for instance, is currently trading approximately 40% below its IPO price. And, poor performance after going public wasn't just restricted to the tech sector - most of the large "household" named companies that IPOed in 2015 have underperformed. In fact, according to a recent report by Dealogic, seven of the top 10 companies to go public in 2015 were trading lower than their offer price including companies like Ferrari, Univar, Blue Buffalo Pet Products and EQT Group.

What's more, there are approximately 140 companies that are considered unicorns today, with about 90 of those located here in the U.S. Given most predictions that these types of companies are overvalued, there's concern that the tech bubble will burst as a result of them listing at the same time, which will greatly impact the markets overall, similar to what happened following the dotcom bubble.

Companies to Watch in 2016. Despite concerns over the large number of unicorns ripe to enter the IPO market in 2016, there is still plenty of capital on the sidelines for companies looking to go public in the coming months. And, the IPO process takes time to unfold successfully, often times taking several years to go public, meaning it is unlikely that those unicorns in the IPO pipeline will list simultaneously.

That said, there some highly anticipated companies angling to IPO in 2016, and it could be an exciting year for tech companies looking to list. Here are some companies within the tech sector that investors should keep an eye on as we enter into the New Year and beyond:

  • Airbnb - valued at $25 billion, Airbnb is expected to continue growing given its disruption to the traditional hospitality industry and its expansion into countries like India and China. Though hampered by regulatory and legal issues from city, state and federal regulators around the globe, Airbnb has made some strategic personnel changes to prepare for its IPO, bringing in a new CFO to help guide the company through the process.
  • Uber - this is one of the most highly valued private venture-backed companies angling to go public in the year ahead. The company announced it was raising2.1 billion earlier this month, putting its valuation at $62.5 billion. Similar to Airbnb, Uber faces legal, regulatory, and competitive challenges, yet it continues to generate high revenues, with estimates coming in around the2 billion mark in August.
  • Snapchat - this unicorn is valued at $16 billion, after raising approximately1.2 billion to date. The company benefits from not being under regulatory scrutiny, but it struggles to create useful content for its community. Similar to Airbnb, Snapchat hired a former Credit Suisse banker, who helped take Alibaba public, as its chief strategy officer.
  • Buzzfeed - this online media outlet draws 200 million unique monthly visitors to its website. The company is valued at $1.5 billion, following investments by companies like NBCUniversal, which invested $200 million in August.
  • Slack - this team-communication software company has approximately 2 million daily active users. As of April, it was valued at $2.8 billion following a $160 million round of funding.
  • GitHub - this is a hosted source-code-repository software company, which has more than 10 million users. It reported a $2 billion valuation in July, following a $100 million funding round and another $250 million round.
  • Stripe - this is a developer-focused payment service startup, which offers integrated applications with companies like Apple Pay, Bitcoin and Alipay. The company's valuation hit5 billion earlier this year following an investment by Visa.