Why Startups Can’t Raise Money in Public Markets

Number of IPOs drop 38 percent globally, biggest decline in China
July 21, 2016 Updated: July 21, 2016

The global IPO market has slowed down in the first half of 2016 because of increasing financial market volatility. Many companies who want to raise capital had to postpone or cancel their plans to go public.

“Although many IPO candidates are on the lookout for profitable investment opportunities, they remain cautious and are holding back for the time being,” stated consulting firm, Ernst & Young, in a report.

The number of IPOs fell by 38 percent compared to the first half of 2015 and the amount raised was down by 61 percent, the weakest since 2009.

China’s economic slowdown, low oil prices, and the Brexit spiked volatility in global financial markets and decreased the appetite for new issues. 

The gloomy global economic outlook has also made IPO candidates more hesitant.
— Alessandro Miolo, Ernst & Young

There were only 437 IPOs worldwide in the first half of 2016. Activity in the IPO market picked up in the second quarter after a period of stagnation in the first quarter. However, “the first half of the year overall remained significantly less than last year,” said Ernst & Young. 

“The gloomy global economic outlook has also made IPO candidates more hesitant. The summer months have been rather quiet so far with regard to IPOs. Uncertainty has increased with Brexit,” stated Alessandro Miolo, a partner at Ernst & Young.

The Chinese IPO market declined the most at 58 percent, due to the country’s economic crisis. The money raised in the Chinese IPO market fell by 84 percent from $30 billion to $4.8 billion in the first half of 2016.

The money raised in the Chinese IPO market fell by 84 percent.
—  Ernst & Young

Interestingly, energy sector IPOs worldwide set a new record in 2016. There were 7 offerings that raised over $1 billion. The largest IPO was the listing of the Danish wind farm operator Dong Energy, which raised $2.6 billion.

Europe, too, suffered declines, but it was the most active region in the world, with 65 IPOs raising $12.9 billion. Six of the ten largest IPOs worldwide took place in Europe.

The U.S. IPO activity (Factset)
The U.S. IPO activity (Factset)

US Lags

IPOs in the United States also declined sharply. The number of companies going public fell 50 percent this year. The total money raised from IPOs fell more than 60 percent, according to Renaissance Capital, an IPO advisory firm. Both the number of IPOs and the amount of money raised marked the lowest since 2009.

The IPO activity in the U.S. tech sector dried up with only three initial public offerings in the first half of the year.
—  Factset

There could be some uptick in future activity though: “The spate of recent IPOs and initial filing signal that the IPO window is beginning to re-open,” stated Renaissance Capital in its 2016 IPO outlook report. 

The IPO activity in the U.S. tech sector dried up with only three initial public offerings in the first half of the year. The recent public offering of Twilio, a cloud communications company, cheered investors as the shares of the start-up soared 92 percent on the first day of trading.

However, the $150 million raised was well below last year’s average of $341 million in the tech services sector, according to Factset, a market research firm.

The U.S. biotechnology industry has been the primary driver of the growth in IPO volume over the past few years.

“From 2013 to 2015, no other industry has come close to matching the Biotech industry IPO volume,” states Factset. 

And the S&P 500 Biotechnology industry has gained 106 percent since 2013, outperforming the S&P index. More recently, however, these firms have struggled, falling nearly 20 percent in the last 12 months.

“It will be interesting to see if this dip in performance leads to fewer Biotechnology firms entering the public market in the future,” said Factset.

Ongoing vitality in the M&A market is also slowing down IPO activities. A well-organized sale is much easier to control than an IPO, which is dependent on numerous external factors, according to Ernst & Young.

“Private equity businesses and firms wishing to dispose of subdivisions tend to prefer a sale over an IPO, particularly since strategic investors are very keen to buy. Prices can be pushed right up,” Miolo said.

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Withdrawn or postponed IPOs in the United States, second quarter of 2016 (Factset)
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