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“Unicorns” and Strategic Buyers Hinder U.S. IPO Recovery, as IPO Activity Drops 51% in Total Number of Q2 IPOs Year Over Year


6/27/16

Brexit Vote Poised to Reduce IPO Activity Even Further

NEW YORK, N.Y. – Following a striking decrease in initial public offerings (IPOs) in the United States in Q1 2016, Q2 IPO activity saw a healthy increase, but still lags behind 2015 IPO figures, according to new research conducted by CohnReznick LLP, a top accounting, tax, and advisory firm.

IPO activity in Q2 2016 may have improved by jumping to 34 from only nine in Q1 2016. But examining year over year data, 34 companies priced in Q2 2016, compared to 69 in Q2 2015, signifying a 51% decrease in IPO activity. Moreover, through 1H 2016, there have been 43 IPOs, compared to 109 in IH 2015, representing a hefty 61% decrease.

“Various market conditions continue to exert downward pressure on IPO activity,” said Alex Castelli, partner and co-leader of CohnReznick’s National Liquidity and Capital Formation Advisory Group. “Britain’s decision to leave the European Union has already caused market instability and will likely continue to cause major disruption. Strategic buyers and corporate M&A have grabbed a lot of companies that might have gone public. In addition, the so-called “unicorns” are reluctant to access public capital due to valuation concerns and drops, creating a meaningful number of companies waiting in the wings. But Twilio’s recent IPO could be an encouraging sign to other private technology companies to go public and a hopeful indicator of what we might see in the second half of the year.”

He added, “With the markets difficult to read and the level of investor receptivity unknown, we have also observed an uptick in the number of companies pursing a dual-track strategy increase funding options and maximize valuations.”

Top findings include:

  • Unicorn Woes – Unicorn companies continue to show reluctance due to valuation concerns. In Q2 2016, there were four middle market technology company IPOs compared to 0 in Q1 2016.  These are the first middle market technology company IPOs of the year. In addition, Twilio’s IPO was successful – the only IPO to price above range this year.
  • A Return To Public Markets for Small IPOs – In Q2 2016, the percentage of small IPOs (proceeds under $50 million) increased to 34% from only 13% in Q2 2015, signaling what may be a return to the public markets for companies often ignored by private investors like venture capital firms.  It has been reported that venture capital firms continue to raise money, but are being more cautious with making investments.
  • Continued Strong Activity in Healthcare and Life Sciences – When compared to other sectors, healthcare and life sciences companies continue to use the IPO to access capital. In Q2 2016, Healthcare and Life Sciences IPOs represented 41% (50% year to date) of all middle market IPO activity. 
  • Pricing – In Q2 2016, one middle market IPO priced above their range.  Eighteen (62%) priced within their range and ten (35%) priced below their range.  Only one middle market IPO has priced above its range this year, signifying an indication of the continued concern that investors seem to have regarding IPOs.
     

Castelli stated, “Today’s market conditions are unique. Investors are evaluating IPOs with a higher degree of scrutiny and heightened concern, business models on a go-forward basis are being challenged, private equity remains plentiful, although cautious and corporate investors seeking growth through mergers and acquisitions are paying premiums for companies they can integrate. But companies with a good story, a great product and terrific momentum should also note the absence of competition from other IPOs, which can help pricing performance.”

The full study will be available in July at www.cohnreznick.com/capitalformation.

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