The Champagne corks popped as Wall Street’s 2016 year-end party started after Friday’s close. The major U.S. stock indexes ended near record highs. But the IPO market didn’t join in on the fun.
Much has been written about what a poor year 2016 was for IPOs. Beyond the headlines, the numbers told a different story: Those clouds came complete with a silver lining.
In 2016, IPOs produced an average gain of 30.5 percent, according to the IPO Scorecard. Yes, that’s right – a gain of 30.5 percent.
That powerful performance in the aftermarket shows that IPOs beat the U.S. stock market. For the record, the Dow Jones Industrial Average climbed 13.4 percent in 2016, while the S&P 500 Index gained 9.5 percent and the Nasdaq Composite Index rose 7.5 percent.
So IPOs on average outperformed the Dow by a ratio of slightly more than 2 to 1, while they beat the S&P 500 by a 3-to-1 ratio and they outran the Nasdaq by a 4-to-1 ratio.
Life in the Slow Lane
In terms of volume, 2016 was the slowest year for IPOs since 2009. A total of 94 IPOs came to market in 2016, according to the U.S. Securities and Exchange Commission filings. (This excludes unit offerings, bank conversions, “best efforts” offerings, blank checks, closed-end funds, companies trading on the pink sheets moving up to the NASDAQ and foreign-traded securities making their debuts in the U.S. capital markets. The latter are public offerings because investors can buy the underlying shares on foreign exchanges before their U.S. pricing dates.)
In 2009, SEC filings showed 61 IPOs made it out the door. Wall Street was reeling after the collapse of Lehman Brothers in September 2008.
Some Winning Numbers
Nevertheless, the IPO traffic in 2016 read something like the old U.S. Marine Corps recruiting poster: “The Few. The Proud. The Marines.”
Consider the following: Sixty-eight of the 94 IPOs priced in 2016 finished the year above their initial public offering prices. That gave investors an IPO win-loss ratio of 72.3 percent.
What’s more, six IPOs finished the year more than 100 percent above their offering prices. (This can be found on the IPOScoop.com website under: Pricing – Last 12 Months.)
The reason for the “slow” IPO volume can be traced back to the stock market and the NASDAQ Composite Index, generally known as the barometer of the IPO market.
In 2016, the U.S. stock market began the year with a steep slide and the IPO Calendar reflected the slowdown. The first IPO of 2016 was priced on Feb. 2 – a late start compared with previous years. Yesteryear’s IPO calendars generally kicked into gear by mid-January.
The U.S. stock market dictated the IPO story. The NASDAQ Composite opened 2016 down sharply and closed on Feb. 11 at its low for the year of 4,266.84, down 14.8 percent from Dec. 31, 2015. It took several months for the IPO market to recover. In May, the IPO Calendar turned out 14 deals. A point of passing interest: 34 IPOs were priced during the first five months of 2016.
In June, the United Kingdom voted to leave the European Union and the reaction – dubbed “Brexit shock” – triggered a sell-off in the U.S. stock market. But the slide was short-lived. Stock prices recovered and the NASDAQ Composite ran up on Oct. 10 to a pre-election closing high of 5,328.67. After that, the NASDAQ appeared to be sleep-walking. It drifted until the U.S. election on Nov. 8. The NASDAQ Composite closed that day at 5,193.49, ran up to a record closing high at 5,487.44 on Dec.27, and finished 2016 at 5,383.12.
Last year pointed out one thing: You need a better stock market than 2016 to get IPOs out the door.
Unicorns in the Wings
Another factor entered the 2016 IPO picture. It was the unicorn class, which consists of companies with an individual capitalization of $1 billion or more. Earlier in the year, there were reports that private equity firms (P/Es) had entered a bidding war for privately owned companies (P/Cs). As a result, P/Cs found it was a lot easier to pick up additional capital from the P/Es than to jump on the IPO Calendar.
Interestingly enough, the unicorn class has grown in recent months, according to a report by CB Insights. On Jan. 2, 2017, CB Insights published a list of 196 companies with a total cumulative valuation of US$652 billion, UP from 171 companies with a total cumulative valuation of US$608.7 billion as of June 16, 2016.
Bottom line: There are a lot of unicorns running around the world with their investors waiting to cash in.
Looking into 2017, many have issued their predictions on what to expect. In reality, nobody really knows.
IPOScoop.com takes the old line: (1) The IPO market is built on a solid stock market and (2) The breeding ground is the IPO Calendar.
As the stock market goes, so goes the IPO market. And the IPO calendar is now a three-week deal. It draws on last week, this week and next week.
Looking into the week of Jan. 9, 2017, the IPO Calendar has nothing, but anything can happen on Tuesday morning, Jan. 3, 2017, when the SEC’s filing window opens on the first business day of the year.
Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do we trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinion.