A choppy first quarter for the U.S. stock market resulted in the least active three-month stretch for initial public offerings in two years, even as breathless reports about blockbuster fundraisings in the private markets continue to make headlines.
With only 34 IPOs, raising $5.4 billion, the U.S. market had its slowest quarter since the first three months of 2013, according to Renaissance Capital. While big names like cloud storage firm
A number of factors contributed to the slowdown.
The S&P 500 has seesawed through the first three months of 2015 and was fighting Tuesday just to stay in positive territory for the year, while the Nasdaq composite and Russell 2000, both better comparables for the younger, smaller companies conducting IPOs, are up 4% or better. Still, a choppy quarter for the markets hasn't helped the appetite for new deals.
Perhaps more meaningful is that Silicon Valley's hottest startups are swimming in cash from venture capital firms and, more recently, mutual fund managers like Fidelity Contrafund's Will Danoff, who has invested in Uber Technologies, Airbnb and Pinterest.
"Technology IPO issuance was likely dampened by the widespread availability of private funding at very high valuations," Renaissance says. "which produced little urgency for companies to seek IPO capital.
Massive funding rounds have lent multi-billion dollar valuations to companies like Uber, Airbnb, Pinterest, Palantir, Square, Snapchat and several dozen more, "which [has] produced little urgency for companies to seek IPO capital," Renaissance notes in its first-quarter IPO review. (For more on the investors and firms providing that cash, read full coverage of Forbes' 2015 Midas List.)
It's also worth remembering that some recent technology IPOs – specifically Box, Hortonworks and New Relic – entered the public markets at valuations that were below their last funding round, a trend that may help explain why peers like Box competitor Dropbox may not be in a rush to join the party if they don't have imminent capital needs.
Couple the first-quarter decrease in tech offerings with a sharp dropoff in energy deals due to the collapse in oil prices and two of the three groups that have paced the IPO market's surging activity in recent years have slowed considerably.
The third, healthcare, remained robust in Q1, accounting for half the 34 IPOs with most of the activity coming from small, early-stage biotech. That in turn prompted the sharp decrease in proceeds, down from $10.6 billion in the first quarter of 2014, as the median deal size of just $75 million was the smallest since 2008.
There are reasons to stay optimistic, from Renaissance's vantage point though. The first-quarter is typically slower for seasonal reasons; the broader market did hit record highs in the quarter despite the uptick in volatility; and the private company backlog remains "substantial." After all, the investors clamoring to invest at lofty valuations will eventually need to exit their positions.
As far as the first three months of 2015, GoDaddy, expected to price its offering this week and raise around $400 million, will be one of the bigger deals after a quarter with just one billion-dollar IPO in Columbia Pipeline Partners LP.
Performance-wise, returns held up as activity faltered, led by Shake Shack and Spark Therapeutics, both of which went public Jan 29 and immediately doubled. Each stock has since held its gains, with Shake Shack up 133% and Spark 200%. The average IPO gained a far more modest 15% in Q1, mostly from a first-day pop that averaged just under 11%.
The underlying figures look less rosy though, with a third of deals falling on day one and almost 35% of IPOs pricing below their planned range. In healthcare, stripping out the huge pop from gene therapy firm Spark, the average deal would have actually fallen 0.2%.
While the first quarter hardly makes for a disaster, the outlook doesn't signal a sharp resumption of faster IPO market activity. New filings were down in the quarter –47 companies compared with 98 a year earlier – and while the ability to file confidentially under the JOBS Act decreases transparency into the IPO pipeline the sharp drop is still notable.
Renaissance notes the private equity-backed GoDaddy debut and filings by online craft seller Etsy and software firm Apigee offer a hopeful sign of more technology activity. But for the moment at least it doesn't seem like the industry's hottest companies, a critical breeding ground for potential offerings, are in any hurry to accept the increased scrutiny that comes with being public while they have no shortage of suitors throwing money their way in the private market.