The initial public offering, or IPO, may not be approaching extinction after all.
Renaissance Capital called the first quarter of 2018 “the biggest quarter in a decade.” And that was before the successful second-quarter IPO of Dropbox, an online file-storage company, and direct listing of Spotify, a music streaming company.
Suggesting the beginning of a Silicon Valley fueled “IPO wave,” The New York Times reported that tech IPOs have already raised more than $7 billion this year — more than all of 2015 and 2016.
We’re still nowhere near the IPO peak of 1996, when more than 1,000 companies went public, but signs are building that we’re past the dry spell that has resulted in a dwindling number of public companies. In recent years, the number of companies failing or merging has far exceeded the number going public.
The number of IPOs has fallen for many reasons, including the cost of compliance with the Sarbanes-Oxley Act; Eliot Spitzer’s global research settlement, which resulted in a lack of research for small company stocks; the dot-com bubble, and the financial crisis.
Renaissance Capital reported that:
- During the first quarter, there were 44 IPOs, which raised $15.6 Billion, the largest amount in a quarter in more than three years.
- The average IPO gained 9%, in spite of the market sell-off in February and March.
- Technology IPOs were a bright spot, raising more than twice the amount of any other sector.
- Proceeds raised year to date ($23 billion) are up 87.6%, while the number of IPOs priced (46) is up 31.4%.
“An important development was the growing presence of Chinese IPOs, which comprised 21% of proceeds, mostly due to the $2.3 billion raised by video streaming platform iQIYI,” according to Renaissance Capital. “It and Dropbox, together with Spotify’s pending April listing, may represent an emerging trend of large private tech companies making their long-anticipated debuts. If this trend continues, it should lead to another multi-year high in the second quarter.”
The potential downside, according to Barron’s, is a shortage of profitable unicorns, which are private companies valued at more than $1 billion, and an abundance of private funding for late-stage private companies.
“With its $95 billion fund, SoftBank Group (9984.Japan) alone could provide the equivalent of three years’ worth of U.S. IPO funding,” Barron’s noted.
So we may be seeing an IPO revival. Or it may be a mirage.