Let’s face it — 2015 has been a terrible year for the IPO market. The number of IPOs plunged 39% to 169, while the amount of money raised nosedived 65% to $30 billion from the last year. According to Vator News, these numbers are the lowest since 2009.
According to Dealogic, the number of IPOs in the technology and Internet sector has reduced over 50% year over year to 29. These companies raised a total of $9.5 billion this year compared with $40.8 billion in 2014.
Is Rise of the “Unicorns” the Reason for this Plunge?
The tech world calls them unicorns — privately held companies valued at $1 billion or more — which may explain the meager IPO numbers.
Unicorns have multiplied over the past decade because of the low-interest environment. Easy availability of cheap debt and fresh capital from hedge funds, private trusts and other investors willing to take more risks for higher returns helped them grow.
Also, some private companies with solid prospects considered the increased disclosure requirements and volatility of public markets as detrimental to their valuations. These preferred to raise cash through private funding rounds rather than via an IPO. The most notable examples are Uber and Spotify.
In the last two years, Uber managed to raise $6.3 billion, while Airbnb garnered $3.5 billion. As per TechCrunch, “… the average private raise for a unicorn is more than $500 million, and the median is $275 million.”
On the other hand, the five unicorns — Box Inc. BOX, Shopify Inc. SHOP, Square Inc. SQ, Pure Storage and Atlassian — that went public this year collectively raised just over $1.4 billion.
Moving on to 2016
Per research firm CB Insights, unicorns may be "dragged to IPO" in 2016 if private investors pull back.
Why venture capitalist and private investors might not be interested in unicorns? Because, a rising rate environment will not allow them to supply cheap money anymore.
Apart from the rate hike, unicorns do not disclose financial performance to the public and some are already showing signs of trouble. For instance, Fidelity Investments recently announced that it had significantly written down the value of Snapchat, Square and several other prominent unicorns in its portfolio.
Anand Sanwal, CEO of CB Insights, believes "There are some companies on this year’s list that may be forced to go public because their valuations priced them for perfection and their results came in somewhere below perfect. And as a result, the private markets may close up on these firms, forcing them to go public. This is something we’ve not observed before."
Box and Square went public at drastically deep discounts — 30% and 40%, respectively — on their last private valuation.
Conclusion
As per Sanwal, "Given the maturity of many of the companies in the pipeline, the uncertainty about private markets, and the increasing calls by investors for companies to go public, we expect 2016 will see public market activity pick up."
According to him, many on the list are not "household names" and operate in "less sexy areas" such as analytics, data centers, security and application integration. Nevertheless, there are a number of high-profile names likely to go public in 2016.
CB Insights’ Pipeline 2016 list has 80 unicorns.
Let’s see how many of them take the plunge.
Want to find the best stocks for 2016? Find out more information about the market-crushing Zacks Top 10 list here >>>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment