So far this year, just over 40 IPOs have priced in the US, down over 50% from last year, according to Renaissance Capital, a Manager of IPO-Focused ETFs.
The first quarter, which marked the slowest quarter for IPOs in seven years, was plagued by volatility driven largely by concerns about the Chinese economy. And while activity picked up in the second quarter, levels remain well below normal issuance, with the June 23 Brexit vote and uncertainty from the Fed causing many companies to hold off on pricings.
“After a very quiet first quarter, the IPO market is still normalizing,” according to a recent report by Renaissance Capital. Pricings were held back by a public-private valuation disconnect in the tech sector along with a wariness caused by poor trading of 2015 IPOs, which are 69% below issue on average, in addition to the overhangs of Brexit and interest rate uncertainty that loomed over the quarter.
One bright spot for 2016? Aftermarket performance of IPOs. The IPOs that priced this year are up 10% on average, according to Renaissance Capital. And IPOs that raised $100 million or more are up 24%, according to Renaissance Capital. This compares with flat returns for the S&P.
The successful IPO of Twilio (TWLO) on June 22 was a key ice-breaker, according to Kathy Smith, manager at Renaissance Capital. It marked the first “unicorn” to complete an IPO in 2016. The stock rose 92% in its first day of trading and continued higher.
However, it was a relatively small offering, raising $150 million.
LINE, a Japanese messaging app, is slated to come public in New York under the symbol “LN” on July 14 and in Tokyo the following day. The Tokyo, Japan-based company plans to offer 35 million shares at a price range of $26.50 to $31.50 per share. This would value the company at about $6.5 billion, indicating strong demand. At the top of the range—and if it exercises its over-allotment—the company could raise $1.3 billion, making it the biggest technology listing so far this year.
The company, which is owned by South Korea’s Naver, had initially delayed its pricing announcement right after the initial Brexit volatility. But it has plans to price as planned, and pricing came in strong.
With LINE, IPO investors will get their first look at what could be the largest US tech IPO since 2014.
LINE highlighted its potential $10 billion valuation in 2014, far higher than current estimates for $6.5 billion. The company has seen a deceleration in sales growth, which was up 40% to $1.1 billion in 2015, as it has focused on profitability (operating income swung positive in the 1Q16).
Line, which has 218 million monthly active users (MAUs) is the dominant messaging app in Japan, Taiwan, Thailand and Indonesia.
“Instead of trying to expand dramatically, they’ve focused on existing markets and reduced marketing spend, becoming profitable at the expense of growing users,” Smith said.
But globally, the company faces fierce competition from Tencent’s WeChat, which has 760 million MAUs, along with Facebook’s Whatsapp and Messenger which combined have about 2 billion MAUs.
The performance of LINE may set the stage for the remainder of 2016 IPOs.
Robust pipeline remains
Renaissance Capital remains optimistic about the remaining pipeline in 2016.
“Even with the aftermath of the Brexit vote and elevated volatility, we expect IPO activity to maintain its current pace or modestly improve for the balance of 2016, supported by a full pipeline, news of more tech companies and LBOs readying their IPOs, and the string of recent IPOs that have delivered double-digit returns,” they wrote in a recent note.
Renaissance Capital also identified a strong slate of private companies that they expect to come public in the second half of 2016.
Jose Cuervo is reportedly looking to raise up to $1 billion in the third quarter and Blue Apron hired former Under Armour (UA) CFO in October and began talking with banks about an offering in June. Spotify in March took on debt with guarantees tied to an IPO and in June hired a head of investor relations.
Periods of low issuance often result in strong companies coming to market at attractive valuations, due to pressure from public investors, according to Renaissance Capital.
“Irrespective of market uncertainties, we believe that many private companies, particularly VC-backed tech, have hit their ‘sell-by’ dates and will be forced to complete IPOs,” according to Renaissance Capital.