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Tough year for IPOs

Reading through a wide range of the financial market commentary and analysis that typically gets published at year-end, one trend identified by many observers is that 2015 was a dismal year for IPOs.

Reading through a wide range of the financial market commentary and analysis that typically gets published at year-end, one trend identified by many observers is that 2015 was a dismal year for IPOs.

The number of IPO’s coming to market in the U.S. last year was 170, which represents a drop by 38% from the prior year. The fall off was even more pronounced when measured in dollar value – with only $28.7 billion in new listings, or a reduction of 48% from 2014, which was the lowest total since 2009, according to Thomson Reuters.

IPO’s in Asian markets suffered a similar drop-off, with new listings reduced by 36% in dollar value from the prior year, while European listings eked out a slender 2% gain year over year.

While the IPO market had started out strong in the early part of 2015, the rate of new issuances slowed markedly in the second half of the year, as equity markets worldwide experienced a bout of extreme turbulence. But even as equity markets regained some ground in the fourth quarter, new issuance in the U.S. virtually ground to a halt in December with only two IPO’s closing in the last month of the year.

As the appetite for new issuance weakened dramatically in the second half of the year, a number of the largest deals got shelved until market conditions improve, such as Albertsons and Neiman Marcus, while others, such as First Data, could only come to market by pricing well below their initially anticipated range.

For those companies that did manage to go public last year, the average return as of year-end was approximately negative 2% or below their initial issuance price, according to the Wall Street Journal. This amounted to the weakest performance in the U.S. IPO market in the last five years.

Amidst this general weakness in the IPO market, perhaps the poorest results were registered in the tech sector, where highly regarded start-ups, such as Etsy, Inc., ended up trading as much as 50% below their IPO price, and other tech companies, including Box, Inc and Square, Inc., found it necessary to price their IPO’s substantially below the pre-IPO private valuations. This pronounced weakness in tech sector has begun to spill over and depress valuations for a number of the large pre-IPO tech companies, with large private investors reportedly taking substantial write downs in the positions they hold in so-called unicorn companies, and down-rounds in the private market being reported with increasing frequency.

But beyond the pain for tech start-up investors and employees, what does the weak performance in the IPO market for 2015 portend for the broader market? A number of bullish analysts seem to think that 2016 will turn out to be a banner year for IPO’s, as pent-up supply of new issuers will look to come to market. Such a scenario only seems possible, though, to the extent that equity markets worldwide manage to regain their footing and the appetite for equity risk returns notwithstanding the prospect of continued tightening by central banks around the world.

In any event, we don’t think the weakness in the IPO market necessarily foreshadows a weakness in the broader market for corporate deal making. Even with the IPO window virtually closed for the second half of last year, we saw healthy and record deal flow here at BankerBay and anticipate more of the same in the mid-market segment as we head into 2016.

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