This year has been a rough one for some companies trying to go public through an initial-public-offering process, or IPO.
Unicorn startups, or privately held companies with valuations over $1 billion, didn’t fare very well in the public markets in 2019, as investors grew increasingly wary of unprofitable companies.
“I think the market was very robust all the way through the first half,” said Kathleen Smith, principal at Renaissance Capital, a provider of institutional research and IPO exchange-traded funds. But then, a few weak IPO performances early in the second half spooked investors, Smith told Markets Insider in an interview.
“Investors got really turned off,” Smith said, and they stopped flocking to buzzy unicorn IPOs. “I’ll call it a buyer’s strike, not wanting to participate because there were such big disappointments.”
Those large “unicorn” disappointments weighed on IPOs for the rest of the year. In the fourth quarter, most companies going public have priced at the lower end of their proposed ranges, Smith said.
While that can be frustrating for companies that use the IPO process to raise capital, it is good for investors, Smith said, because companies that are underpriced tend to gain in the market later.
“When investors are risk averse, IPOs are priced better,” she said. “This is a good time for investors in the IPO market, not such a good time for companies.”
Overall, the IPO market slowed this year, Smith said. In 2019, 152 companies IPO’d, raising roughly $44 billion, according to Smith. That’s less than 2018, when 192 companies IPO’d and raised nearly $47 billion in proceeds, Smith said.
Still, IPOs in general – not just those with sky-high valuations – performed well for investors in 2019. The Renaissance IPO ETF is up 30% year-to-date through Tuesday’s close, compared to the S&P 500 index, which is up roughly 25% in the same time frame.
Smith said that in 2020, it’s likely that companies will try to push back on the processes available to them for becoming public, because the “regular IPO process is not working” for all companies. That could include more direct listings, like Slack in 2019 and Spotify in 2018, even though they haven’t been successful for investors, she said.
Click here for the top unicorn IPO flops of 2019, in chronological order.
Source: Markets Insider