When planning an IPO, proper timing and pricing are perhaps the most important decisions to be made. However, with volatile markets, interest rate increases and an ongoing economic recovery, significant questions exist about whether the current environment is conducive to going public. The answer is that at any time, IPOs in some sectors are more likely to succeed than others due to a combination of factors.
In 2015, 173 U.S. companies held IPOs and their stocks are trading at an average of 5% below their IPO price. This suggests that investors – especially large, institutional investors – don’t have a strong appetite for IPOs at this time. Furthermore, the Federal Reserve’s recent interest rate hike may affect the immediate demand for IPOs.
But the fact is, a company’s prospects will vary depending on the market conditions in its specific industry. Consider ttechnology and healthcare…
A PwC report on Q3 U.S. technology IPOs found the market was quiet. The two U.S. tech IPOs in Q3 were worth $168 million – a sharp drop from the same period last year, when the equivelent number brought in $524 million. Certainly, several tech startups that had been planning IPOs recently decided the timing wasn’t right and dropped their plans to go public, citing poor or unstable market conditions that wouldn’t support the share valuations they felt their companies deserved. Many others that have gone ahead with their plans are pricing shares at the lower end of their projected ranges.
It’s worth noting, however, that the prospect of a lower share prices shouldn’t necessarily scupper plans for an IPO. Online payment startup Square, for example, recently decided to proceed with its listing despite drastically cutting its share price to $9 – an amount that valued the company billions of dollars lower than what private investors estimated only last year. However, on the day it went public, Square’s stocks jumped by 45%, demonstrating that investors could simply be skeptical of the potential overvaluation of tech companies, rather than of market conditions in general.
In comparison, the healthcare sector is experiencing a boom of IPO activity. Health care accounted for more than half of the U.S. IPOs in Q3 and has been by far the most popular sector for deals each quarter for more than a year. The sector even traded slightly up during Q3 – posting a 2% return on average – making it a relative bright spot compared to the overall negative trend in 2015.
Ultimately, investor confidence will be the largest determining factor in the strength of the IPO market in the months ahead. While stronger economic fundamentals and more stable markets are expected for the 2016, companies would be well-advised to focus on sector-specific conditions, rather than the overall market, when determining the ideal time to go public.