Reuters / Brendan McDermid
- 2019 has seen several unicorns enter the public markets, with billion dollar offerings from the likes of Uber, Lyft, and Pinterest.
- According to several experts, the IPO market isn’t likely to slow down for the rest of the year because of how well new companies are performing once they start trading.
- Kathleen Smith, a principal at Renaissance Capital, said the companies that have already gone public so far this year are attractive to investors because they have high growth potential.
- Companies that are planning to go public typically look at how similar firms are performing in the market. If the returns are good, more IPOs are likely to follow.
- 2019 looks to be following that trend.
- Visit the Markets Insider homepage for more stories.
When 2019 kicked off, the government was already mired in a shutdown that would extend through most of January.
That weakened expectations for initial public offerings, since any company hoping to test the public market needs to file with the US Securities and Exchange Commission — a federal entity.
But after the government re-opened, IPOs continued again with earnest. To date, it’s been an exciting year for public market debuts. And if experts are to be believed, the momentum will continue through year-end.
Let’s start with a review of the 2019’s top IPOs. High-valued, venture-backed companies like Uber, Lyft, Pinterest, Zoom Video Communications, and Beyond Meat have all completed billion-dollar IPOs this year.
Not only has more than $25 billion been raised so far in these offering, according to data from Dealogic, but the companies that have gone public are demonstrating strong performance in the market.
The Renaissance IPO ETF, which tracks the overall performance of the IPO market and includes all five of the companies listed above, climbed as much as 39% this year through its record high in June.
According to Kathleen Smith, a principal at Renaissance Capital — which provides institutional research in addition to ETFs — newly public companies are performing well because many of them are high-growth companies, and investors yearn for these types of investment opportunities in a slow-growth economy.
And the economy has been anything but inspiring throughout the first half of 2019. In fact, the Federal Reserve recently signaled it will cut interest rates in order to stimulate economic activity — a scenario believed to be unthinkable as recently as January.
The strong track record blazed by the companies that have already gone public in 2019 has also offered inspiration to others looking to test the market.
"The best reason that the IPO market is working is that the returns are working for investors that are in these new companies," Smith said.
Barrett Daniels, a partner and national IPO services leader at Deloitte, agrees. The strong performance from new companies in the market will encourage more private companies to go public this year, he told Markets Insider in a recent interview.
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Daniels points out that the IPO market is extremely reactionary. When firms are considering whether or not to go public, they typically look at how other businesses similar to their own are doing in the market, which Daniel said can be one of the important factors in the decision to pursue an IPO.
"The IPO investment community is starving, clearly, for these exciting, technology companies because there haven’t been enough of them to invest in recent years," Daniels said. "There’s always a premium placed on growth."
Brad Miller, the head of equity capital markets in the Americas at UBS, highlights a third reason for the torrid IPO activity: that many of the companies going public are tech or tech-enabled businesses — a characteristic that helps them achieve scale and grow much more quickly.
"Everything may not be a technology company, but there technology-enabled companies that are taking historically average operating models with a technology angle or technology enhancement to that model," Miller told Markets Insider. "There are a tremendous amount of industries that will be disrupted going forward just based off of the minimized barriers to entry."
Despite the healthy returns from many of the companies that went public this year, there are some that are lagging behind. For example, Lyft is trading well-below its initial offer price.
There are also lingering macroeconomic risks that could impact overall market health, which would extend to new companies looking to enter the public market. Current headwinds include, but are not limited to, President Donald Trump’s ongoing trade war with China and the rising unpredictability of Fed monetary policy.
Market volatility is the key when it comes to IPOs, Daniels says. If the market experiences big swings due to macro events like the trade war, that can have a downward impact on public offerings. But as long as volatility stays low, Daniels said, the IPO should remain solid for the rest of 2019.
Daniels also said that if the markets and economy hold up, the next few years could see a steady flow of IPOs. Several big-name private companies including Airbnb and Palantir are reportedly eyeing IPOs in 2020.
Smith also said that as long as returns remain strong and a recession isn’t around the corner, the IPOs will keep coming.
"Performance is the engine that drives the IPO activity." Smith said. "If the performance of IPO’s are good, more IPOs will get done."
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