Past blog posts have covered the almost peculiarly sleepy IPO market in the United States, its causes, and its consequences. Megan Richards checks in this week to show that not much has changed despite the otherwise buoyant investment landscape. The steady erosion in the number of publicly traded equities has been a tailwind for the market, and by extension, the investment management industry so far. Longer term, we see challenges presented by the undercurrent of illiquidity brought about by the unavailability of public offerings as a reliable exit opportunity for private equity.
The stock market rallied in the first five months of the year, with the Dow Jones and S&P 500 reaching record highs and continuing to climb. Nevertheless, IPOs remain scarce compared to prior years. Just nine venture-backed technology companies have gone public through May, down from 14 IPOs through the same period in 2016. With the availability of favorable financing options that remain in the private market, the supply and demand balance is changing and companies choosing to go public aren’t following the traditional route anymore. Snap’s public offering and Spotify’s potential IPO rumblings are indicative of these trends.
Between the drought of new investment offerings and increasing support for passive investing that circulated in 2016, investors appear to be desperate to find the next big opportunity. So even though Snap announced that its public offering of Class A shares would be devoid of voting power, investors still jumped at the chance to own a portion of the company. Snap’s IPO, with its non-voting shares, was twelve times oversubscribed. The demand for new public offerings is there, but the supply side is lacking and this imbalance is tipping power away from investors.
Only 105 companies went public during 2016, the lowest number since 2009 and 65 fewer than 2015. Total dollar value of public offerings fell to $18.8 billion from $30.0 billion the prior year. Despite investor optimism earlier in the year, the IPO environment remains stagnant as we approach the halfway mark of 2017. Many companies are realizing they just don’t need an IPO. Opportunities for M&A exits still exist, public company oversight is arguably onerous, and alternative sources of funding that are more favorable to the company – and its founders – are becoming increasingly popular.
So when companies actually do decide to go public, they are finding ways that benefit the company – and founders – rather than investment banks or large investors. Spotify announced its consideration of offering public shares later this year, but bucked tradition by stating that it intended to do so through a direct offering. That means the company could bypass the investment bank, save on placement fees, and offer more of its shares to the general public, rather than to just large institutional investors. Doing so might mean that Spotify would lose out on a first day share price pop, but with $1 billion in debt financing, Spotify’s public offering could be as much a way to return capital to investors as a way to raise funds for growth.
These companies aren’t by any means committed to the IPO route. AppDynamics has been another widely discussed deal this year after it entered into a transaction with Cisco shortly after announcing its plan to IPO. With many competing options for startups and the declining appeal of traditional public offerings, public investors may have to settle for less than ideal terms. In an environment where investor desperation is high and other profitable avenues for startups exist, the startups may be gaining the upper hand when it comes to going public and they are starting to play by their own rules.
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