|Traders work at the post that will trade First Data stocks during the company's IPO on the floor of the New York Stock Exchange|
The US IPO market is not a great place to be right now for issuers. Since the start of the year, 30% of IPOs have priced below range and things have worsened since August. In October, 85% of IPOs came in below range.
The downward pressure on prices shows that investors have become weary of buying IPOs only to see negative returns. “Investors are being very discerning right now given the returns we’ve seen in the after-market, and the volatility of the equities market more broadly,” says Doug Adams, head of ECM for the Americas at Citi.
Indeed, 2015 marks the first time since 2011 that IPO returns have been negative. For the year up to mid-November the average return was down 8.6% from the IPO price.
Indeed, issuers particularly concerned about aftermarket performance are pricing deals very cautiously. Payments processing firm First Data came with a $2.6 billion IPO in October at $16 a share, which was trading flat on November 16. However, the original price range was $18 to $20 and owner KKR raised far less than the intended $3.2 billion it was seeking.
By contrast, Ferrari’s October IPO, which was priced at the higher end of its price range of $52 had traded down to $50 by November 15. At $893 million, the luxury car manufacturer’s IPO was the second largest in October.
With pressure on pricing, several potential issuers have walked away. In November fintech firm LoanDepot postponed its IPO citing poor market conditions. The non-bank mortgage lender was looking to raise $510 million, offering 30 million shares at a range of $16 to $18. Luxury retailer Neiman Marcus also postponed its $100 million IPO in October. Caribbean mobile technology company Digicel cancelled its potential $2 billion IPO which would have been one of the largest this year alongside supermarket chain Albertsons’ $1.6 billion IPO – which was also postponed.
Not everyone wants to wait however. Josh Coates is CEO of learning management software maker, Instructure, a firm that launched its IPO in November – the same day that LoanDepot pulled its deal. Instructure’s IPO was priced at the low end of its range but Coates says: “You can’t time the markets and we were ready to go.”
Indeed, now may be as good a time as any to bring an IPO, as the environment is unlikely to change any time soon. Issuance this year is a long way down on last year. The challenging market environment has resulted in far lower volumes in the IPO market this year compared with 2014. There have been 165 IPOs in the US compared with 292 for all of 2014, according to research firm Dealogic.
“I’m afraid this is going to go on into 2016,” says one ECM head. “Sponsors don’t want to get hurt so are asking for a discount and that is not going to change next year. We’re in a risk-averse environment again and the sellers need the buyers more than the buyers need the sellers. It’s not that we will see forced sellers – a lot of companies don’t need to go public urgently – but they will have to give up more than they want to.”
Adams is less certain that the environment is here to stay for that length of time. “Certainly there is only a short window until the end of the year for companies to get their IPOs done so they may have to give way to price sensitivity of investors in their pricing, but we don’t see this as a new trend. It’s more about the current market environment.”
Tech companies in particular are having to give up more than they would like. A mere 12% of IPOs in 2015 (20 in total) have been from tech companies, according to Renaissance Capital. That is the smallest percentage of tech IPOs since 2008. Last year there were 62 tech IPOs in the US, according to Dealogic. Those that have come to market have had an average total return of -3.0%.
Nervousness around the valuation of mobile payments provider Square saw its IPO price below its $11 to $13 range at $9 in November. The deal valued the firm at $2.9 billion, while its private valuation had been $6 billion just one year ago. However, the shares surged 45% in the first day of trading to close at $13.
Adams says tech firms have chosen the private market over the public market. “More than 60 companies have raised capital in the private market at valuations over $1 billion year to date, so they haven’t needed the public market,” he says.
One head of equity syndicate expects that to change, saying: “The private market can only support so many firms, and investors are going to start wanting liquidity. We expect more issuance next year with tech firms just facing the music on pricing.”
Healthcare, which has been the dominant sector this year with 77 issues, has had even worse returns than tech at -6.2%. Surprisingly however, financials have stood up better post-IPO than most sectors. The 22 deals done this year have returned on average 5%.