The parent company of Snapchat is expected to fetch a large sum when its initial public offering hits later this winter, but the company may play an even larger role in determining whether or not more IPOs hit the market.
Right now it’s not looking so good.
The number of companies deciding to go public has dwindled over the last few years. Last year, only $18.8 billion in proceeds were raised for initial stakeholders from the 105 the IPOs that were priced, according to Renaissance Capital, a manager of IPO-focused Exchange Traded Funds. That figure pales in comparison to 2014, when $86.6 billion was raised on the back of 275 priced public offerings. Even subtracting the nearly $22 billion generated by Alibaba, the most notable IPO of that year, 2014 was still more than twice as lucrative as 2015 and three times more gainful than last year.
It’s been a painful downward spiral for IPOs. Investors were getting burned on the new issues as they dropped in value, so they stopped getting involved in the market, which in turn discouraged private companies from going public out of fear they wouldn’t get the full value of their business. This cycle feeds off the fears of each side. Investors don’t want to overpay. Issuers who don’t want to be underpaid. The result: A drought.
The good news is the cycle broke a bit recently and there was an uptick in IPO activity at the end of 2016, likely due to the presidential election finally being over. “The election got in the way of companies moving forward,” said Kathleen Smith a co-founder of Renaissance Capital. “There was a degree of uncertainty, but once it became clearer what we could expect, we started to see a pickup. The IPO market has a heartbeat now. It was pretty much dead last year.”
The bad news: There are signs that private companies are still hesitant to go on the market. While seven U.S. IPOs have been complete already this year, the new issue cupboard looks mostly empty. Just three companies filed paperwork for IPOs in January. That figure is tied with last February as the slowest month for filings since 2009.
This is where Snap comes in. If the company, which is likely to be the second largest U.S. tech IPO ever (behind Facebook) at a value of around $25 billion, fetches a price that’s in the sweet spot–high enough for the owners to get a ton of money out of it but low enough for investors to see a nice jump after the stock hits the market–more companies will be encouraged to try their hand at going public. But if Snap underwhelms, then pulling the market out of its IPO slump will not be, well, a piece of cake.