IPO Market Drops to 7-Year Low

A disconnect between private and public valuations caused many tech companies to push back their offerings or withdraw them altogether.
Sean AlloccaDecember 20, 2016
IPO Market Drops to 7-Year Low

The sluggish U.S. IPO market recovered from a dismal first half of the year, but still fell well below 2015 levels in both activity and proceeds raised, according to new research by Renaissance Capital, an IPO investment adviser and research firm.

The year’s 105 pricings raised $18.8 billion, down from $30 billion raised in 170 deals a year ago. Annual IPO proceeds dropped 37% year over year to their lowest level since 2003.

“[Two-thousand sixteen] lacked momentum, and while there is every indication that the market will improve, we’re still missing the larger IPOs that drive activity and volume,” said Alex Castelli, a partner at consulting firm CohnReznick.

The report suggests that a two-year drought in tech offerings — traditionally the market’s bread and butter — led to the 2016 decline. A disconnect between private and public valuations in the sector caused many tech companies to push back their offerings or withdraw them altogether.

“The primary reason for the lack of tech IPOs is the public-private disconnect on valuation, a tension that can only be remedied by [venture capitalists] caving in to their growing urgency to sell … or by time as companies grow enough to justify their lofty private valuations,” the Renaissance Capital report said.

Mergers and acquisitions also provided alternate paths for tech companies looking for quick cash. The payment processor TransFirst and security software vendors BlueCoat and Optiv all had previously filed for IPOs before withdrawing their applications due to mergers and acquisitions.

“Companies continue to pursue private capital sources instead of an IPO, creating liquidity for their shareholders and employees and raising capital to expand,” Castelli said. “They will enjoy the benefits of an IPO without taking on the risk or expense of going public.”

IPO activity decreased almost across the board in 2016, with healthcare, financial, consumer, and energy sectors all hitting multi-year lows.

Although activity continues to fall, there is a silver lining. In the aftermarket, IPOs had their best-performing year since 2013. The average IPO was up 23% from its offering price, and the recent successes of two tech IPOs, Twilio and Nutanix, could be a good sign for the sector going into 2017, the report suggests.

While experts are optimistic for a recovery next year, the IPO pipeline seems to be running dry. Only 64 names are on file looking to raise $18.3 billion, as of the second week in December, which marks a 46% and 32% decline, respectively, compared with the totals at the end of 2015.

Hopes for a recovery in 2017 could hinge on the IPO of Altice USA, the U.S. arm of the multinational Dutch cable company. It’s expected to price next year at an estimated valuation of $25 billion.