Thanks to a very volatile fourth quarter, 2018 was not a blockbuster year for initial public offerings (IPOs). But it was a very good one.
One-hundred ninety U.S. companies went public, 30 more than in 2017, and the total proceeds raised increased 32% to $47 billion, according to Renaissance Capital, manager of the Renaissance IPO ETF. Both the number of offerings and the total dollar amount raised were the highest since 2014.
IPOs of biotech and tech companies surged, and foreign issuers joined the party, eventually constituting 28% of IPOs on U.S. exchanges in 2018.
Entering the fourth quarter, the U.S. market was well on track to hit the 200-IPO mark for only the fifth time since 2005. Then came the October surprise: big drops in the stock market and large spikes in volatility. The CBOE Volatility Index hit 24.98 on October 11 and has remained elevated since then.
In response, IPO activity fell by 66% in the final two months of this year compared with 2017.
The stock selloff has also caused the average IPO return for the year to “sink to a measly 5%,” says Renaissance Capital. What’s more, the average aftermarket return of this year’s IPOs (calculated using the closing price on an IPO’s first trading day) fell to -11%, the lowest return since 2015.
Equity market turbulence normally “puts a significant dent in IPO activity.” So, it would not be a surprise if IPO activity in the first quarter of 2019 is also muted. However, Renaissance Capital sees hope in the form of “a large backlog of unicorns firmly indicating plans to complete some of the largest-ever IPOs.” Exhibit A are ride-sharing services Uber and Lyft, which both have taken the step of confidentially filing with the Securities and Exchange Commission.
According to Renaissance, “as long as the broader markets do not sink further, 2019 could still be a big year for proceeds if not for deal count.”
As far as the market pipeline for next year, there are 64 IPOs publicly on file looking to raise a total of $9 billion, down from 73 at year-end 2017 and 69 the year before that. The pipeline’s “active backlog” of companies — those that have submitted filings within the past 90 days — stands at 28 deals targeting $2.6 billion.
Appearing on Renaissance’s closely guarded Private Company Watchlist (PCW) are 226 companies that are the subject of IPO speculation. More than 50 of them have reportedly selected banks or filed confidential S-1s.
Several large private tech firms besides Uber and Lyft are on on the list. They include Palantir, Pinterest, and Slack. Online women’s fashion retailer Revolve could also potentially set terms next year, Renaissance says.
Other consumer companies that may be gearing up for listings in 2019 include online mattress retailer Casper, jeans maker Levi Strauss, and streaming spin-class provider Peloton Interactive.
The IPO market for 2019 is more difficult to predict than 2018’s was, says Renaissance, due to “increased volatility caused by domestic concerns about Fed policy and the sustainability of economic growth.” Internationally, the fate of Brexit, broader European political instability, and trade relations with China could also put a damper on IPO activity.
Among the range of possible outcomes for 2019, Renaissance says there could be as few as 125 IPOs or as many as 200 “if the current uncertainties are resolved constructively and the broader market resumes an upward trend.”
Due to the negative returns for IPOs and the broader equity markets in the fourth quarter, however, 2019 IPO activity (measured in number of deals) is more likely to be below 2018. However, proceeds could very well be higher in 2019 if unicorns like Lyft and Uber finally take the plunge.