A look-back and forward projection.
2016 in review
The past year has been dubbed as a reality check for the initial public offering (IPO) market. Economic and political uncertainty with the Brexit vote and the turbulent U.S. presidential campaign were key contributors to a more sluggish IPO market globally, with almost all exchanges recording substantial declines in IPO activities in 2016 following two years of heightened activity.
The bleak IPO market—some might suggest the worst since 2013—led to significant market skepticism of potential valuations. Investors were drawing back considerably to re-evaluate and focus on their existing portfolios while applying greater scrutiny on deploying new funds.
In Canada, the TSX showed a significant drop in IPO funds raised in 2016 over 2015. There were eight new issues for 2016 totaling $440M versus 22 new issues at $3.9B in 2015 and the first time in several years that funds raised fell below the billion-dollar mark.
The IPO market in the U.S. for venture-capital-backed companies almost came to a standstill in 2016 following a number of high-profile IPOs earlier in the year that failed to achieve their private sector valuations. Overall venture financing activity declined by over 20 percent from the previous year (the lowest in six years). In the latter half of the year, a small number of tech companies tested the IPO waters again. Twilio showed strong Q3 and Q4 pricing, which could be a positive sign for the IPO market in 2017.
Europe’s venture capital market experienced a challenging year overall, with IPO volumes and values hitting their lowest level since 2009. However, the region showed some resilience in total capital invested in Q4’16 compared to the experience of Asia and the Americas. In a post-Brexit world, investors appeared to be taking a ‘business as usual’ approach to their investments until more details around the UK’s Brexit strategy became clearer.
Hong Kong saw a 26 percent fall in IPO funds raised in 2016, yet maintained its status as the largest IPO market in the world in terms of funds raised, with an estimated 120 IPOs, and HKD 195 billion in 2016 in funds raised.
On the horizon
But there are signs that the tables are turning and that the market for IPOs will improve.
Confidence seems to be building as the political climate stabilizes. In Canada, January and February saw two notable consumer market IPOs: Freshii (TSX: FRII) and Canada Goose (TSX, NYSE: GOOS), raising gross proceeds of $144.2 million and $390 million respectively.
Tech ventures of note are also reaching a maturity stage which could bode well for IPOs in that sector. According to a November 2016 story in Bloomberg News, as of November 2016, potential tech players seeking IPOs for 2017 include Real Matters Inc., Vision Critical Communications Inc., Hootsuite Media Inc., D2L and PointClickCare Corp. Biopharmaceutical may also be returning to the scene with a filing by Zymeworks Inc. on the TSX and NYSE. (The last Canadian pharmaceutical IPO by a Canadian company on a Canadian exchange was Imris Inc. in 2007, according to an April 2017 article in the Financial Post by Barry Critchley.)
Overall the TMX reports that $13.3 billion of equity capital was raised on the TSX ($11.4B) and TSXV in Q1 2017 ($1.9B), representing a two percent increase over Q1 2016, with 40 issuers going public, seven new CPCs (capital pool companies), 23 new ETFs and one new closed-end fund.
In the U.S., expectations that a number of large private tech giants will head to IPO early in 2017 are driving renewed interest in the IPO market. There are some significant IPOs that have been completed or are scheduled for 2017, including AppDynamics and Snapchat's parent Snap Inc. (which debuted as the largest technology IPO since Facebook). Other tech heavyweights - Uber Technologies Inc. and Dropbox - are expected to follow suit. This opening up of the IPO market is expected to have a positive ripple effect on broader venture capital investment.
While the investment environment remains cautious in Europe, a number of positive factors have helped with building resilience, including several successful IPO exits by European companies. Government initiatives by the UK, France and Germany also have set the stage for additional investment in 2017. One potential IPO of note on the horizon is Spotify, one of Europe’s most valuable tech startups. However, there is speculation that may be pushed to 2018.
China and Hong Kong remain relatively lacklustre, but is expected to see gains in 2017 as IPO approvals increased towards the end of 2016 over the same period the previous year. China continues to face numerous delays, however, with hundreds of companies deadlocked, waiting for the opportunity to exit. Despite these drawbacks, many companies from mainland China view Hong Kong as a better option for IPO than the U.S., where valuations are often less certain. One positive sign for the IPO market in Asia during Q4’16 was the Hong Kong based IPO of the selfie app maker Meitu.
Are you ready for the IPO market and is the market ready for you?
Given the recent uncertainty in the world economies and the IPO market, greater vigilance is in order when assessing if market factors support your IPO timing. It also involves determining the extent to which potential investors may be interested in the products or services you offer.
Before pursuing an IPO, companies need to assess if they are truly ready to go public, by way of:
So while there may be positive indicators on the IPO front for 2017, proceed with caution continues to be the watchword for some time to come.