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IPO market is still very disappointing considering the S&P 500 is at a record high
The good news on IPOs for the first half of 2017: There are a lot more of them than last year. The bad news: It's still not great.
Halfway through the year, 66 companies have gone public so far, according to Renaissance Capital. The good news is that 11 more companies are going to try to go public this week and next in a valiant effort to beat the traditional July 4 slowdown. Five companies alone announced terms on Monday, including meal-kit services firm Blue Apron, which will seek to go public next week.
If all 11 make it to market, the total will be 77 companies for the year so far. That's better than last year's miserable showing of 42 but far fewer than the 104 that went public in the first half of 2015, which capped three strong years for IPOs.
This is a mild disappointment, considering the markets are at historic highs and the after-market performance of recent IPOs has been strong. The Renaissance Capital IPO ETF (NYSE Arca: IPO), a basket of roughly 60 of the largest IPOs of the last two years, is up 22 percent this year, far outperforming the 9 percent performance of the S&P 500.
Most of the largest deals of the year have had healthy gains since their IPOs:
Recent IPOs (after-market performance)
Floor & Decor (NYSE: FND) up 110%
Canada Goose (Toronto Stock Exchange: GOOS-CA) up 60%
MuleSoft (NYSE: MULE) up 45%
Emerald Expositions (NYSE: EEX) up 29%
Cloudera (NYSE: CLDR) up 14%
Why the outperformance? "Because IPOs are being priced more reasonably, so they have more room to move up," Kathleen Smith from Renaissance Capital told me. "Investors in the IPO market have become hyper-sensitive to valuations."
That's good news: Investors in IPOs this year have been a happy bunch. Issuers, however — who want to get as much product as possible to market — are facing a much more challenging environment.
Still, all it takes is for a big name like Snap (NYSE: SNAP), which on Friday approached its IPO price of $17, for investors to get cold feet about other tech unicorns sitting out there.
It doesn't bother Smith, who is interested in investing in companies at the best possible price: Snap going to its IPO price "shakes the market and creates fear. That makes valuations more reasonable."
And that's exactly the big issue for the second half: valuations. Scores of companies still are reluctant to go public because of a valuation gap between their private valuations and what the public is willing to pay for them.
As a case in point, Smith points to Tintri, a cloud platform company that is seeking go public next week. At the midpoint the company would be valued at $389 million, less than half the $785 million valuation during the last round of fundraising in July 2015.
Will we see more like Tintri in the second half? Smith says we will, because some will have to get out the door. She notes that while some companies can afford to wait to grow into a higher valuation, others may not be so lucky. And the haircuts will come, for those that have to get out the door.
She insists that funds that have millions locked up in expensive tech unicorns aren't going to sit on that money forever: "Some of these companies have had investments in these companies for ten years. They have to provide returns to their investors. That means they have to find a way out. There is going to be pressure from the limited partners. And pension companies have a boatload of money in private ventures. They have obligations they have to pay out as well. They can't stay private forever. That is not the business model for the private equity or venture people."
Another issue for the IPO market: out-of-favor sectors. There are dozens of energy IPOs that are waiting to go public, but cannot imagine doing it with oil below $45. And there are plenty of retail companies that also are reluctant to go public in a brutal retail market.
Just ask Blue Apron. You can bet they will be sweating their IPO in light of the Amazon (NASDAQ: AMZN)-Whole Foods (NASDAQ: WFM) deal.
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