Is the IPO market topping out?
Has the IPO market reached its peak? According to recent research from Renaissance Capital, initial public offerings in the U.S. look to be at an inflection point. This year, IPOs are on track to push along a streak they haven’t hit in more than a decade, a notable sign of the top. But recent market volatility could slow new issues quickly, signaling the market may have already peaked. Investors, including some large private equity firms seeking to sell big buyouts, may lose their chance to cash out before year end.
According to Renaissance Capital, 131 IPOs have raised $22 billion so far this year. That’s about a third less than last year through this time, but exactly in line with the number of IPOs issued in 2013 at this point. That year posted a total of 222 new offerings.
If we surpass the 200 IPO mark this year, it would mark a three-year streak, a milestone that hasn’t been hit since the market heyday of the late 1990s.
The biggest risk to new offerings is volatility, says Matt Kennedy, analyst at Renaissance. The VIX volatility Index hit its highest levels since the end of September 2011. (Equity issuers typically avoid volatile markets because it is more difficult to price an offering and buoy a stock after the price is set.) What’s more, many companies have lost value shortly after they hit the public market, a bad omen to future issuers.
“The IPO market serves as a reality check for private valuations,” Kennedy says. If a company can cement a value in the public market through an offering, and uphold that value, that sends a signal that the IPO market is strong. This year, many IPOs have done well on the first day, but valuations have fallen quickly.
In the coming months, private equity firms responsible for more than $1 billion in new stock are expected to launch deals, about half the total. Many of these companies, including First Data, Neiman Marcus, and Univision, are “mega-LBOs”, or very large buyouts that private equity managers completed several years ago.
If the IPO market dries up, these companies may seek a private buyer, a process that is long and often uncertain when the equity market is shaky. “If the public markets are so volatile, and the IPO market appears to be closing, then you might see private funding dry up a little bit too,” Kennedy says.