IFR’s US ECM Roundtable was held on September 15, as stock market indexes were ticking historic highs. Investors were showing greater resolve to chase higher returns by participating in ECM deals.
All of the major US stock indexes were up double-digits on a percentage basis year to-date –Nasdaq 23.1%, S&P 500 11.7%, and DJIA 12.7%
The dollar value of IPO issuance on US exchanges had nearly tripled in the first three quarters of the year. But the number of deals priced rose only modestly, a disappointment versus bullish predictions at the start of the year.
An extended bull market might normally be associated with an IPO boom, but the rebound has remained elusive.
Technology companies, in particular, have maintained ample access to venture capital and crossover funding, allowing them to stay private for longer and avoid the extra scrutiny that comes with going public.
Unicorns – private companies valued at over US$1bn – such as Blue Apron, Cloudera and Snap transitioned into the public markets but proved disappointing. Airbnb and Uber have yet to be sighted, even though policymakers continue to revamp IPO rules to ease their path.
Spotify, the music streaming provider, was considering a direct listing as a way to sidestep a traditional IPO entirely.
Social Capital Hedosophia, a special purpose acquisition company (SPAC), offered another alternative with a US$600m IPO in early September that offers unicorns a “backdoor” means of going public. At the time of meeting SPACs had raised US$7.7bn in 2017, a post-crisis high.
The panelists addressed whether the IPO market (particularly for tech companies) is broken, as some (including Social Capital) have alleged.
Certainly the methods of raising capital are changing in the race for greater pricing efficiency. But the alternatives to a traditional IPO are far from perfect. Private capital remains available but valuations aren’t always reliable; direct listings are likely (and have happened) but carry the risk that a company is orphaned; and SPACs remain a viable alternative but are limited by the quality of management and capacity constraints.
The growth of passive investing at the expense of the stock pickers and cut-throat competition for block trades are among the challenges facing equity capital markets.
Yet there are big opportunities too given the prospect some mega-IPOs will come to market in the next few years.
At the same time, the regulatory burdens of going public have been lowered; the alternatives to going public more plentiful; and, once public, the speed of capital raising/monetising investments is unprecedented.
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