Snap may have gone public to much fanfare, but does its debut signify a renaissance for the 2017 IPO market? Regardless of how seriously investors take its performance as a bellwether, there are plenty of other important factors to take into account, particularly for private investment firms looking to take portfolio companies public.
Our 2016 US PE & VC IPO Review delves into multiple datasets to outline and analyze key trends, such as:
- PE & VC-backed IPO activity’s steady decline since 2014
- The resurgence in both median & average offering sizes by PE portfolio companies
- How past trends in venture financing have complicated current IPO prospects
Plus, sponsor Deloitte offers five key considerations for companies preparing to go public.
A longer-term approach
The dismal relationship between the private and public markets over the last couple of years has been nothing short of impressive, in the worst way. Connected at so many intersections, yet simultaneously, equally distant, the public and private spheres pose a complicated prospect for analysis. Traditional public market investors have found themselves in late-stage venture rounds, armed with an abundance of capital, an appetite for risk, and the patience to play a much more silent role with the companies they back. Shortly after this trend began to manifest, publicity started to break around the ostensibly unexpected transparency the likes of mutual funds would be required to offer concerning the valuations of their private holdings, which in many instances were marked to market using a given set of publicly traded comparables. Yet these same nontraditional investors helped fuel the continued trend of venture-backed companies ducking an exit to the public markets, and in many cases opting to continue raising primarily private capital. For those that actually sought more immediate liquidity, there was a clearly preferred exit route: acquisition by a strategic buyer.
Further, more than $2.1 trillion in total M&A transaction value across North America and Europe was completed in 2016. For a financial sponsor, exiting to that market—which has been full of strategics ready to outbid any competitor as they look for accretive transactions—has been far more attractive.
2016 saw the fewest companies come to market since 2009 and the lowest amount of capital raised via public offerings since 2010. The cumulative count of privately backed companies has continued to increase, while the sheer number of publicly listed firms has moved the other way. The conclusion to be formed around the future state of the IPO market will need to incorporate a longer-term cycle approach, just as we apply to traditional public and private asset classes. Yet today, we sit towards the bottom of that cycle and we do not foresee any meaningful changes in the coming quarters.
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The current landscape
US-based formerly PE & VC-sponsored companies that went public in 2017
A slow year for both PE & VC
- 2016 saw a significant slump in private investor-backed IPO volume and aggregate value—35% slide in value and 41.5% slump in volume year-over-year (YoY)
- Primary factors contributing to the decline were relatively more attractive M&A options, market volatility and continued amenability on the part of investors and lenders
- Venture-backed debuts plummeted in particular, with biotechs primarily driving what little IPO activity occurred
- Given the turmoil in the back half of 2015 and continued choppiness in early 2016, offerings likely got put on hold until markets stabilized for a longer period
- Last but not least, with global median valuation/EBITDA multiples at 9.2x in 2016 for general M&A, both the level of demand on the part of strategic buyers and the eagerness of sellers is clear—the same figure for PE and venture-backed IPOs in the US last year stood at 3.7x
- Given the decline in volume, volatility became much more pronounced on a quarterly basis
Median PE metrics still stable
PE IPO metrics
M&A a more attractive option, but the companies that went public targeted shrewdly
The median PE-backed corporate acquisition valuation/EBITDA multiple rang in at 9.7x in 2016. Granted, exit volume was down last year so not as many companies were able to garner such heightened prices. However, those that did at such generous valuations illustrate how going public paled in comparison to selling off to a corporate buyer for most sponsors. Furthermore, corporate M&A is typically speedier and less fraught with hard-to-control variables. Of the companies that did elect to go public in 2016, however, a greater proportion hit their pricing range than any other year this decade, which is indicative of both the much smaller number of debuts and also more targeted pricing given the market environment. The surge in median post-valuation is suggestive in a similar fashion.
Past VC trends complicate prospects
Trends in VC prior to IPO
The median time between the first VC round to go public was a staggering 8.3 years in 2016. As the median age of US VC-backed companies that got financed in the past three years and have raised at least $50 million in aggregate is just over nine years, the backlog of potential IPO candidates is only further exacerbated.
The glut of late-stage VC funding responsible in part for that backlog has additional consequences. In 2016 the increase in IPO valuation over the most recent VC valuation was the lowest of the decade. However, despite the scarcity of debuts in 2016, a majority of those are currently trading up, and market caps are relatively healthy, signifying how high the public markets’ tide is rolling right now.
VC numbers skew lower
VC IPO metrics
With few clearly auspicious signs, VC-backed IPOs remain mostly a question mark
In the wake of a lackluster year for venture-backed debuts, the question is whether 2017 will prove a rebound of sorts. How long will it take businesses to ready themselves for a debut, and which factors will they be assessing as they look to time their listing? 2016 numbers and current market sentiment paint a complicated picture. Public markets are coasting at or near all-time highs—based on anticipated policy changes—but key economic indicators still prompt significant concern. The median post-valuation has rarely been lower—how much will the markets tolerate money-losing enterprises? Perhaps the most telling figure is a majority of IPOs priced within range in 2016. Even though few went high, those going public were still able to price shrewdly enough to at least meet expectations and, as is illustrated on the next page, end up performing reasonably well.
Overarching trends hold stable
IPOs by sector
B2B dominated PE at $4.2B; VC debuts primarily in pharma & biotech, at 43% of volume
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