There’s a whirlpool forming in the world of IPO’s. There’s talk that a number of successful companies are about to make their IPO, helping pick-up a declining and lackluster IPO market.
A Weak Market in 2015-2016
The number of companies going public picked up in 2017 after a two-year decline, with 55 more IPO’s than in 2016. The 105 IPO’s of 2016 represented lows not seen since 2009, when US IPO’s were below a total of 20. However, out of the IPO’s offered in 2016, 21 companies were classified as technology companies, and almost all have seen their shares increase by 50 percent over their IPO prices. Global Tech IPO’s also rose 85% in 2017, with the number of deals worth more than $40 million hitting 100 for the year. Total proceeds from these transactions amounted to $25 billion US dollars. It’s not currently clear whether the success of tech shares in 2016 has helped to encourage tech companies to make an IPO in 2017. What is clear is that the majority of tech companies going public are doing very well as a result. SecureWorks and NantHealth made their IPO in 2016 and traded below their IPO price, as did Blue Apron and Snap in the following year, but these are exceptions. Also, the dip in IPO’s in 2015 and 2016 did not the reach lows seen in the early 2000’s, when there were 84 or fewer IPO’s every year 2001-2003, and in 2008 bottomed out at a low of 31 IPO’s before rising again in 2010.
Signs of a Growing IPO Wave
Moving forward to 2018, Dropbox hit the public market, preceded by Cardlytics and Zscaler. Dropbox Inc was valued at $7.1 billion US dollars when it made its debut this year after staying private for almost 11 years. This $7.1 billion valuation was nearly a third below its valuation in 2014, a clear sign of how heated the private tech market was in 2014. Is it possible that overvaluation was the cause of the drop in IPO’s in 2015 and 2016? Bloomberg reflected on the time leading up to this period, noting that IPO’s industrial companies had led the way, with tech companies being middle performers and energy companies being the worst performers. Tech companies were only 8% of 2015’s IPO’s, down from 12% in 2014, indicating that they were staying private for longer.
Strong 2018 and 2019
Spotify went public this month through a direct listing, with a market valuation of $26.6 billion. Spotify’s long-awaited IPO may be the catalyst for other tech companies to pull the IPO trigger, including many unicorns. Pivotal Software, who last week made their IPO priced at $15.00 dollars, ended their first day at $15.73. Docusign, valued at $3 billion at the time of their last funding round in 2015, has made their IPO priced at $29 dollars per share, with prices jumping 35% the first day and moving into the high 30’s. Palantir Technologies is also looking to go public in 2018 alongside big names such as Airbnb, Buzzfeed, and Ancestry.com. Lyft also look set to make their IPO in 2018, with an alleged revenue growth of $150 million in the first half of 2016 to $483 million in the first half of 2017. Uber reportedly plans to make their IPO in 2019, adding to the set of large tech companies joining the public market.
Effect on the Secondary Market
So where is the secondary market heading? The secondary market has acted as an undercurrent for those companies who don’t wish to go public for quite some time, allowing investors to trade privately among themselves without waiting for an exit by the company. What will happen to this secondary market in light of the recent developments in IPOs?
Obviously, the fact that these Unicorn’s end up going for an IPO at a later stage gives more credibility to the pre-IPO secondary market as an investment class. As large companies make impressive IPO’s in 2018, this will attract further interest in investing in startups and raise the hopes of investors to find the next big pre-IPO company before it goes public. As more investors look to buy a piece of the next big potential pre-IPO company, this may boost the secondary private equity market. The larger the upcoming IPO’s and the more attention they attract, the more investors may be interested in acquiring shares of other pre-IPO companies, meaning a potentially hot secondary marketplace.
However, there is another angle. Let’s look again at Spotify. Spotify may be an example of a company who had ethical considerations when choosing to initially join the secondary market. In an article from April 2nd, Yahoo Finance referred to Spotify’s direct listing at the New York Stock exchange as a “novel method” and almost anti-Wall Street. The IPO itself was not underwritten and there was no bank or building society to buy shares, meaning banks would only make a fraction of the profit of a regular IPO. In the run-up to the IPO, over 7.8 million Spotify shares were sold on the secondary market. Spotify released 10 million new shares in its last quarter and does not intend to release new shares upon going public. The cited article goes on to explain that companies might use the secondary market as a route for going public and that by selling their shares and releasing ‘pent-up demand’ they can minimize volatility when going public.
Back in 2016, there were predictions that the long road to an IPO would mean a secondary market boom for unicorns, which we see taking place now with Spotify, Uber, and DocuSign. The secondary market has also been on a gradual climb since 2008 and reached its peak transaction level in 2017 (see graphs above courtesy of Preqin Secondary Market Monitor), with no indication that this market is ready to slow. As reported by Forbes, in 2002, transactions in private equity’s secondary market were worth $3B, just one-nineteenth 2017’s record volume of $58B. Looking ahead to 2019, Uber now has the backing of SoftBank and say they are committed to a 2019 IPO, leading next year’s potential class of newly public companies. With major IPO’s on the horizon, the secondary market looks promising in the years ahead.