IPO-hungry investors look to have their moment in 2019
Uber, Pinterest, Slack and others gear up for debuts, setting stage for a record year
A whipsawing stock market could mean a bumpy path to public markets in 2019 for some of the fastest-growing and most richly valued private companies ever, but it isn’t currently expected to derail them.
Stock markets that have sold off sharply in recent months have been even more in tumult, thrashing up and down as the year ends. The Dow Jones Industrial Average notched its worst Christmas Eve ever and then logged the biggest point gain in its history the next trading day. In the past three months, the S&P 500 has fallen 15% and the technology-laden Nasdaq is off 18%.
Those declines are threatening to bleed into a 2019 that many anticipate could be a record-breaking year for initial public offerings in terms of money raised. A host of bigname tech companies for whom public investors have been waiting years, including Uber Technologies Inc., Lyft Inc., Pinterest Inc. and Slack Technologies Inc., is preparing for stock-market debuts as soon as the first half of next year.
Rajeev Misra, the chief executive of SoftBank’s $100 billion Vision Fund, says he expects the public markets to be a key source of future capital for the more than 70 companies his firm has invested in. In the second half of 2019, he expects one of the fund’s portfolio companies to go public each month on average.
“The IPO market is robust,” he said, even in the face of the recent selloff and volatility.
But there is no guarantee 2019 will break records, especially if stocks continue to sell off and swing wildly. As stock prices fall, share sales become less attractive to issuers, who naturally want to maximize proceeds. Lower prices aren’t always embraced by potential investors either, as they fear missing out on the opportunity to participate in a quick run-up they can cash in on.
Still, advisers to many of the pre-IPO companies say their preparations continue. Either way, IPO experts don’t envision a smooth ride.
“Next year has the potential to be a big year for the IPO market but it won’t be a straight line,” said Michael Zeidel, a partner at law firm Skadden, Arps, Slate, Meagher & Flom LLP who specializes in new issues. “We’ll see windows open and close.”
At the same time, concerns that more market declines lie ahead and that the economic cycle may have turned could actually fuel IPO activity by putting pressure on firms considering listings to finally take the plunge.
“People are cognizant that we are 10 years into a stock-market expansion; as a result, they don’t want to wait indefinitely,” said William Connolly, head of technology equity capital markets at Goldman Sachs Group Inc.
After several years in which the hottest startups opted to stick with private capital, a steady drumbeat of companies tapped U.S. exchanges in 2018. As of Dec. 28, 231 companies made their debut on U.S. exchanges, including 55 technology and internet companies, raising $60.8 billion and $20.9 billion, respectively, according to Dealogic. That is significantly more than they had raised in both cases for the full years in 2015, 2016 and 2017, but down from 2014, which was dominated by the record-breaking IPO of Alibaba Group Holding Ltd.
IPO stocks performed well in 2018—a key reason why the floodgates between private and public companies started to open. U.S.-listed and technology IPOs have outperformed the broader indexes in 2018, down 1.9% and up 0.8% on average respectively, compared with a 7% decline in the S&P 500. Before the market swoon, the IPO returns were much better.
But investors who received IPO allocations are likely better off than those who bought into the stocks after they began trading: U.S.-listed IPOs jumped 13.1% on average on the first day of trading but were down 13.9% after that, Dealogic data show. Technology IPOs followed the same trajectory, rising 26% on the first day of trading and falling 20.1% from then.
By the fall, many companies that were expected to debut in 2018 delayed their plans. While some big-name companies still successfully launched, they had a more difficult time pricing their offerings. Two of the biggest fall IPOs were those of biotechnology giant Moderna Inc. and music-streaming company Tencent Music Entertainment Corp.
Tencent Music, a highly anticipated offering heading into 2018, delayed its IPO after October’s bout of choppy stock trading. It relaunched its offering in early December but was forced to price its shares well under its original valuation. Shares of the company, which fetched a valuation of more than $20 billion at pricing, rose in their first day of trading but have since fallen below their IPO price before recently rebounding slightly above it.
Moderna, which had been one of the most highly valued health-care startups, raised more than $600 million, pricing its shares at $23 apiece in early December. Since then, Moderna’s stock has struggled and it now trades at around $14.
Still, Uber and Lyft both took steps toward going public well into the selloff, confidentially filing their IPO paperwork with the SEC late this year.
Many of the largest companies are wedded to going public in 2019, regardless of market conditions.
In some cases, like with Uber, they have told investors they would not raise any additional private capital. For these companies, the question will be less about whether to proceed than where public investors will value them.
Rick Heitzmann, founder and managing director of venturecapital firm FirstMark Capital, says he’s optimistic about the pipeline.
“There are many iconic companies that public-market investors have been eagerly awaiting for years,” he said. “These companies are durable and long-term-focused and should be able to list regardless of market conditions.”