It is no secret that the IPO market has been at a standstill in 2016, clocking in the worst start in history since the 2008 financial crisis during the first quarter of the year. To recap the lackluster activity recorded to date, there hasn't been a single deal that has priced outside of the healthcare industry, which brought eight companies public so far this year, raising approximately $700,000 million, the smallest amount of proceeds seen in the first quarter for the past 20 years. Of those eight deals, the companies' performance was largely propped up by their venture backers, who bought shares during and after the IPO in seven of the eight deals, and private equity firms did not participate in any of the deals that priced. And putting this deal flow into perspective based on activity from year's past, 2015 saw 33 IPOs close in the same period, which were worth $5.5 billion, while 59 deals were completed in during the same timeframe in 2014, totaling $10.1 billion.
But, given the unprecedented headwinds that have been present in the global markets since the beginning of the year, including mark downs of private company valuations, market volatility, concerns about China, perceptions of high market valuations due to loose monetary policy, and the decrease in energy prices, it's not surprising that the IPO market has been lethargic throughout the first quarter.
While the shortage of deals to date is concerning for companies that are looking to go public this year, IPO experts say there is a light at the end of the proverbial tunnel. Below are some factors that investors should be watching, which could energize the IPO market in the second quarter and beyond:
- Increase in filings since January - there have been approximately 42 companies that have either recently filed or updated their filings since the beginning of the year. This bodes well for other companies looking to go public this year, as it will likely spur additional IPO market movement if companies such as U.S. Foods Corporation, a food distributor, or Albertsons Companies, a grocery company, go public.
- Global markets are continuing to stabilize - with the turbulent market performance recorded at the close of 2015 and into 2016, it is no wonder that companies looking to go public have waited to list until economic conditions improve. According to financial analysts and equity market experts, the economy is on the path toward stability as we enter into the second half of the year. In fact, recent market performance has improved investor sentiment and there's been an increase in risk appetite among companies looking to IPO. Sectors to watch include tech, media, telecom and/or consumer goods, as deals within these growth categories are attractive to the buyside and will likely spur additional issuers to enter the market.
- Let past IPO market performance speak for itself - market performance is cyclical, allowing experts and savvy investors to look at previous cycles throughout history as an indication of what is likely ahead. In previous IPO market droughts, history dictates that when IPO issuance resumed, IPOs outperformed. In fact, within the 11 prior cycles in which IPO activity floundered, the S&P 500 was up 4 percent on average in the three months following the IPO market re-opening and the IPOs that went public in those three-month periods were up 24 percent on average. While there's no guarantee that this will happen this time around, the possibility exists given the improvements seen in the markets recently, which could signal the gradual increase in the number of companies that get off the sidelines and go public.
- Start-ups are paring back spending to improve valuation - private equity firms have been reticent to invest in a capital raise for start-up companies this year, given the overvaluation that occurred for several household named companies that significantly underperformed once the company went public. As a result, venture capitalists have been funding well-performing start-ups that are waiting for the markets to improve before they list on the market. This lack of liquidity has caused many companies to par back spending and shed workers in an effort to cut costs and stay afloat. This could bode well for these companies as they get closer to the IPO finish line, making them more attractive to prospective buyers once they are on the market.
- Shrewd investors know that the time is now to invest - every smart and self-directed investor knows that the best time to enter a market is when it's near the bottom. Given that the IPO market is very near the bottom, investors would be wise to seize the opportunity as soon as they can and jump in after doing their due diligence, as soon as IPOs finally start pricing. While much research is needed to vet these opportunities, and seeking out the advice of an advisor is recommended, there are likely to be some great opportunities for investors to get in on at the ground floor in the coming months, which will help drive up demand and stimulate issuance across the IPO market throughout the year.