Experts think the IPO window could finally bust open in the second quarter

Renaissance Capital, the IPO research firm, has published a new report about the first quarter of this year, and, as you might expect, it doesn’t paint a pretty picture.

For starters, it notes the U.S. IPO market hit the lowest levels in the first quarter since the financial crisis of late 2008. It notes that not a single deal priced outside of the health care sector (which we’d flagged for you in this recent story). It also notes that of the eight deals that managed to price and collectively raise $700,000 million, the companies’ performance was largely propped up by their venture backers, who bought shares during and after the IPO.

There is, however, a silver lining. Echoing a conversation we’d had last week with another IPO expert — IPOScoop founder John Fitzgibbon — Renaissance Capital Principal Kathleen Smith told us today that a handful of pre-IPO companies could soon inject new life into the torpid IPO market. Our chat has been edited for length.

TC: Renaissance’s new report notes that healthcare IPOs have averaged a return of 20 percent so far in 2016, but it adds that that’s thanks to “substantial buying by their existing shareholders.” Is that a bad thing?

KS: It doesn’t mean they aren’t doing well, but it means there’s concern about their liquidity. Their tradable float is small — even smaller than their deal size would suggest.

TC: That’s not a brand new trend, though, is it? Haven’t health care investors long bought up shares to keep the price of their portfolio companies from dropping until the stock becomes more liquid? 

KS: It has long helped to get the deals done. But we’ve seen the percentages increase quite a bit. It used to be that [VCs] would [buy up] 15 percent of the [IPO and post-IPO] shares; now it’s more like 40 percent, and I’d say it began ticking up over the last 24 months. In one recent deal, [for the gene editing company] Editas, insiders bought 67 percent of the float.

The goal in going public is to establish a valuation publicly that either helps other companies to understand them and perhaps buy them at that accepted valuation, or to raise more money down the road, which most [biotech companies] need to do, even though most [generate] capital from the IPO.

TC: In the meantime, there were no tech IPOs in the first quarter. How worried should private tech investors be?

KS: We’re expecting some IPO icebreakers. The overall stock market has been getter more stability. Following some big rollercoaster rides last August and in January, it’s less volatile. An index of ours that tracks [companies that have gone public] in the last two years is still down for the year but it’s had strong outperformance since February; it’s run up almost twice the S&P 500. It tells you about investor comfort and suggests [new issuers could have a more favorable reception].

TC: Are there any exciting IPO roadshows getting under way?

KS: Nobody is marketing right now. And we don’t know until the minute a company files a prospectus with terms that they’re going to move forward.

But we think we should be seeing companies start to move forward in the next couple of weeks. Everyone is watching BATS Global Markets [which is the second-largest stock-exchange operator by market volume, and planning a second attempt at an IPO this quarter]. Others that everyone is watching includes [the cycling chain] SoulCycle, which is profitable [and filed to go public last July]; MJM Growth Properties [a real estate investment trust that filed to go public last week]; and US Foods, a big food distributor [that filed to go public in February].

TC: No tech names?

KS: There’s more of a slowdown there. Companies have been able to stay private and many are still losing money; their business models aren’t completely formed. I do think investors will be more interested in tech IPOs, but companies will have to show that they’re profitable or close to profitability.

TC: If these other companies have successful IPOs, will that have any kind of ripple effect that benefits tech companies?

KS: For sure, absolutely. That will make investors feel more confident.

Some companies won’t get the valuations they wanted. But being a public company is very valuable when capital is drying up. For one thing, enterprise [customers] don’t worry as much whether a company is going to be around.

Take [the storage company] Box. Even though it may have had a painful IPO, it has more financial strength now than maybe Dropbox, which has been the bigger private company and maybe should have been out there already, too.

Photo: Box CEO Aaron Levie, just right of center, on the day of his company’s January 2015 IPO.