The permafrost that had settled over the market for initial public offerings has begun to thaw. Renewed investor interest in new issues fueled a 41 percent gain for IPOs in the third quarter, according to Renaissance Capital, the best showing since the fourth quarter of 2013.
Dealogic notes that the eight U.S.-listed tech IPOs that were priced in the past six weeks have risen by an average 50% from their offering price. On a full-year basis, the average new issue is up 32%, the best showing since 2000.
In response, investment bankers are hoping to line up a strong flow of IPOs in the quarters ahead. In this segment, performance is crucial as investor interest in IPOs can only be sustained when investors smell the chance to capture rapid gains.
While China’s ZTO Express (ZTO) has been the biggest deal thus far in 2016, with a $1.4 billion valuation, the resurgent wave of IPO activity is expected to lure larger firms into the IPO process. In late October, for example, we learned that Snapchat (which goes by the corporate name Snap Inc.) is looking to raise $4 billion in an IPO that values the firm in the range of $25-35 billion.
Snapchat is part of a group of highly touted “unicorns,” which are privately-held tech firms that have been valued at $1 billion or more in their recent venture capital financing rounds. At last count, there were 174 such unicorns, with around a dozen firms such as Uber, AirBnB, SpaceX and Pinterest that are worth more than $10 billion.
Yet there’s a reason why many of these firms have yet to pull off long-rumored IPOs. “In today’s environment, many firms are learning that they can’t price an IPO that is too richly-valued,” says Kathleen Smith, co-founder of Renaissance Capital LLC.
She adds that the average IPO in 2016 has had to price its offering at 5.7 percent below the mid-point range. Those bargain-priced offerings may help explain why 63 percent of this year’s IPO are now trading above their IPO price, she adds.
Leave It To The Pros
To be sure, it can be hard for most retail investors to know whether a new IPO has been attractively-priced. “That approach is best left to institutional investors,” says Smith. Moreover, investors buying an IPO right after it has opened up with large gains can lead to weak subsequent returns.
That is why her firm’s Renaissance IPO ETF (IPO) only buys new issues when the fund goes through a quarterly re-balancing. (Some large new issues, such as Alibaba, enter the fund through a “fast-entry” process just a few days after the firm goes public.)