December 17, 2015
By Derek Thomson
The US IPO market slowed in 2015, unable to maintain the 2013 and 2014 IPO levels, which were the highest since the technology boom of the late 1990s. Despite a strong start to the year, investor demand for IPOs decreased in the second half of the year, resulting in a quieter, perhaps more normalized, fourth quarter, reminiscent of 2012 levels. The fourth quarter was characterized by declines in filings and weaker pricing, however, post-IPO performance did recover somewhat as market volatility fell. Consider the following:
- Year-over-year, the number of IPOs and proceeds raised is down – 196 IPOs raised $33.6 billion in 2015 compared to 304 IPOs raising $87.1 billion in 2014
- Q4 saw 35 IPOs raise $7.1 billion, a 22% slowdown from the 45 IPO’s in the previous quarter
- No. of IPOs that priced below the range increased to 60% in Q4’15 from 27% in Q3’15
- Q4’15 IPOs saw 14% returns and outperformed the S&P 500, which increased 6% in the fourth quarter, and is flat for the year
- The Federal Open Market Committee announced a raise in the federal funds rate after 7 years of near 0% interest rates, expressing the Fed’s confidence in continued US economic growth
Competition from M&A
A hot M&A market is driving fierce competition with IPOs. M&A is currently seeing record high deal value – with an increasing trend toward mega deals – compare this to IPO pricings which have increasingly fallen short of the initial valuations set by issuers and their underwriters. This environment encourages companies to participate in a dual track process – preparing for an IPO while also analyzing potential buyers. This enhances M&A’s role as a prime exit strategy for private equity and venture capital, and can be seen in Petco, Interactive Data and SunGard’s announced sales after filing for their IPOs.
Increased global uncertainty led to a significant increase in market volatility in the second half of this year. This increase in volatility negatively impacted capital markets, and the IPO market in particular as investors took to the sidelines to await clarification of numerous macro-economic and geopolitical challenges. Indeed – after a record June which recorded the most June IPOs since the technology IPO boom in 1999, sentiment changed and the pendulum swung back in favor of the buyers. Market volatility also had an impact on high-yield debt issuance – there were 52 high-yield deals in the fourth quarter, a decrease of 15% from 61 high-yield deals in the third quarter.
Early Stage Investors Win
Private equity sponsors and venture capital backed half of Q4 IPOs – while this is in line with the full year picture, the relative proportion of private-equity backed IPOs declined after featuring prominently in the 2013-2014 IPO market, while venture capital has continued to be active, even as the IPO market cooled. Most recently, several large private equity-backed companies have postponed their debuts – LoanDepot, Neiman Marcus and Albertsons among them.
Energy Cools while Technology returns
The energy sector’s challenging year worsened in the fourth quarter, while a subdued technology sector reemerged to lead the quarter in proceeds raised. Continuing declines in oil prices closed the window for the energy sector with no oil and gas related IPOs in both the third and fourth quarters – the slowest activity for the energy sector since the first quarter of 2012 which saw just one IPO. Technology IPOs, which had been quiet in a year where high private valuations extended the public company timeline, returned to the market with several high profile debuts including First Data, PURE Storage and Match Group. While small biotechnology deals continued to drive volume (accounting for approximately a quarter of all IPOs in both 2014 and 2015 – a historically very high proportion), the presence of the larger tech IPOs pulled the quarter’s average deal size up to a 2015 high.
While we’ve seen a significant slowdown from the surging levels of 2014 and 2013, we expect the IPO market to remain relatively healthy and in line with what we’ve seen this year, although M&A will be a strong competitor for issuers seeking liquidity. That said, investors will likely adapt and get more comfortable with the new normal level of market volatility. Combined with a more stable interest rate environment, global growth rates and geopolitical landscape, investors are expected to continue to look to the IPO market for longer term investment opportunities.