A strong share price performance by newly listed companies stands out as a bright spot for Wall Street this year but trade tensions and the risk of higher market volatility loom as challenges for initial public offerings in coming months.
While the S&P 500 is less than 2 per cent higher in 2018, this year’s IPO class has averaged a return of 26 per cent from the offer price, data from Renaissance Capital, which runs IPO-focused exchange traded funds, shows. Technology IPOs have on average produced gains of more than 50 per cent.
All told, new companies have raised just over $35bn in the first six months of the year, with tech accounting for more than a quarter of the proceeds according to Dealogic. This marks the best first half in terms of both proceeds and number of deals since the same period in 2014.
“The reason [for the pace of issuance this year] has to do with market sentiment broadly, valuations and the consistent outperformance in the IPO market versus relatively inconsistent returns in the secondary market,” said Jim Cooney, head of Americas equity capital markets at Bank of America Merrill Lynch.
The return of technology companies to public bourses bodes well for the second half of the year according to bankers. In recent years, tech companies have avoided public ownership by raising large sums privately, giving rise to so-called unicorns, or companies that have reached valuations of $1bn or more without going public. Some, such as Airbnb and Uber, have reached “decacorn” status.
“There is an evolution across tech companies as they have greater scale and growth visibility,” said Michael Millman, global head of technology banking at JPMorgan. “As a result, an increasing number of companies are contemplating an IPO.”
The biotech sector is also heating up. In June, a period that traditional precedes a summer lull in listings until September, 15 biotech companies have listed, the highest monthly total in about four years.
Not every deal has been a hit, however. Shares of ADT, the home security company, priced have lost nearly 40 per cent since it listed in January.
Any pick-up in market volatility is seen weighing more on valuations than deals.
“The way [market volatility] would be extracted in the pipeline is slightly lower valuations,” said Mark Hantho, chairman of global investment banking and capital markets coverage at Deutsche Bank. “I don’t see it being something that will slow down the pace of the deals but could affect some of the valuations.”
Mr Cooney said: “Our expectation for the second half is that we would see a continuation of robust issuance and continued outperformance of IPOs.”