The U.S. IPO market has been struggling since August of last year, and nearly came to a halt in 2016, with only four deals — all in biotech — pricing since the start of the year. Six non-biotech IPO attempts were postponed.
The IPO window should open soon
The Renaissance IPO Index, which tracks the performance of the last two years’ worth of IPOs, significantly underperformed markets starting in August through the first half of February. But a recent surge in the index, up about 14% since the middle of February, may signal that an end to the IPO drought is in sight, says Smith.
The outperformance "tells us that investors are looking at the existing set of IPOs and coming in with more confidence buying them," Smith says. "We think it's likely in the near-term that the window of issuance will now open after being closed for a couple of months."
Recently IPO’d stocks outperform after IPO droughts
Historical data compiled by Renaissance Capital shows that strong IPO returns often follow periods of low issuance.
In past cases of inactivity that lasted more than 31 days since 2000--including after the Facebook IPO in May of 2012 and during the euro debt crisis in August of 2011--the average 90-day return for companies that came public within the first three months after the IPO window opened was 24 percent, outperforming the S&P by a staggering 20 percentage points.
Smith says this is partly due to IPOs pricing at attractive valuations and the best-positioned names in the pipeline coming out first.
Some of these high-growth, well-positioned companies set to be the first out of the gate--which Smith calls the “IPO icebreakers”-- include SoulCycle in consumer, BATS Global in financials and Frontier Airlines in travel and leisure.
The IPO window is expected to open soon
While IPOs rebounded quickly after the Facebook offering in 2012, they remained slow for several years after the 2008 financial crisis and the 2000 dot-com bubble. Smith believes the European debt-related 2011 slowdown (which took the market about two months to reopen and about six months to return to normal) is the best guide for timing as to when we will see a pick-up.
The bottom line: We should expect a pick-up soon. And it is expected to be strong.