Yves here. Notice how many of the IPOs that got pulled were planned private equity exits. And Richter dares to call them…gasp…LBOs!
Now, these periods when the IPO market is shut or barely open for business can be harbingers of protracted periods of investors pulling in their horns on risk, or it could just be short-term jitters that will soon seem like a bad memory. But if IPO markets continue to be hostile., it will dampen private equity fund returns.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street
Party over: “Pent-up supply” in a world with no demand.
“We all thought that we might finally get a year where we would be able to put four quarters together,” UBS global head of equity capital markets Sam Kendall told Reuters. “If you looked at the pipeline and how people were thinking about the world, it just felt good. And then the wheels came off.”
The two measly IPOs in the US in December brought the total for the year to 170, down 38% from 2014, according to Renaissance Capital. By that measure, it was the worst year since 2012.
In terms of dollars, only $28.7 billion in IPOs were booked in the US in 2015, down 48% from 2014, and by that measure, according to Thomson Reuters, “their worst year since 2009.”
Numerous IPOs were pulled or shelved this fall due to “turbulent markets,” as it’s called. They included some LBO queens, owned by private equity firms, such as supermarket Albertson and Texas-based luxury retailer Neiman Marcus that had gotten hit by oil bust contagion [read… Retail Sales in Texas Plunge].
A number of IPOs were pushed through by lowering their IPO prices, like the erstwhile hero of the year, payments systems provider First Data, another LBO queen that KKR acquired in 2007. Initially, the IPO price range was $18 to $20. But there wasn’t enough appetite. So the IPO price was lowered to $16. That was in mid-October. On Monday, it closed at $15.60.
“We expected a big IPO class emanating from 2007 and 2008 private equity investments, some of which represented the last investments in people’s funds, and they ended up not pricing in the second half,” explained Credit Suisse global head of equity capital markets, David Hermer.
But he hasn’t given up hope. There’s always next year. “There is a tremendous backlog of IPOs, so we expect a big year in the U.S. market,” he said. And he threw in the magic words: “pent-up supply.”
There sure is a lot of it. In addition to the mega-LBO queens that PE firms are trying to dump, there are the startups. The Wall Street Journal now counts 84 VC-funded startup companies in the US alone that have a “valuation” of $1 billion or more. Eight of them have a valuation of $10 billion or more.
Just those 84 companies have a combined valuation of about $300 billion. How are they, plus the innumerable startups with valuations of less than $1 billion, plus the big LBO-queens the PE firms are trying to get rid of – how are they all going to go public next year when this year, only $28.7 billion in IPOs made it across the line?
No one knows. But that’s what is now called “pent-up supply.” In a world with no pent-up demand, or any kind of demand, much of this “pent-up supply” might remain pent up for a long time. And many companies will never make it over the line.
For them, the mythical “IPO window” had closed. For the IPO window to open, there must be smooth high-flying markets where gullible enthusiastic investors buy into any story, brush off big losses, ignore high cash-burn rates, and swallow hook, line, and sinker the alternative financial and operational metrics proffered by management and Wall Street.
And the moment this IPO window closed, according to Reuters, was last summer:
The strong run of deals at the beginning of the year was blown off course during the summer, as concerns over a slowdown in China and uncertainty around a looming U.S. rate rise increased volatility to levels not seen since 2011, at the height of the European debt crisis.
In fact, that window wasn’t all that wide open to begin with for much of the year, but this summer investors felt the cold draft and closed it some more. So the number of IPOs in the fourth quarter plunged 53% year-over-year. And in December it collapsed 86% to just two IPOs, the worst December since 2008, when there were zero IPOs!
The IPOs that actually made it over the line didn’t fare well, on average. The Renaissance Capital IPO index swooned 10% year-to-date. Not exactly a big reason for investors to get overly excited about buying what PE and VC firms are trying to unload.
The apartment sector of the magnificent commercial property bubble in the US is struggling with an identity crisis, and industry gurus have now declared a “plateau.” But after the last time they’d declared a “plateau,” the market crashed. Read… Bone-Chilling “Plateau” in Apartment Boom Resurfaces, Smartest Money Bails Out