This year has been a good period for new listings, although recent volatility has put others off. While the easy days are behind us, sensibly priced issues are still likely to be popular.
Data from PwC shows we saw 173 initial public offerings (IPOs) to the end of September, raising over $40bn (£31.4bn) and up almost 50 per cent on the previous year. Recently, however, market volatility has seen several of these IPOs suffer poor performance, while others have been pulled due to concerns about an unfavourable reception. Recent arrivals, of which Blue Apron and Snap are the most obvious examples, have not performed well. Blue Apron has lost almost 90 per cent of its valuation since it went public, while Snap has declined by over 70 per cent.
With ride-hailing heavyweights Uber and Lyft planning listings, and data-mining firm Palantir also a candidate, 2019 looks set to be another strong year for IPOs. But the fate of Blue Apron and Snap is symptomatic of the wider shift in investor appetite that is taking place as the boom of easy money comes to an end, and that could affect the valuations IPOs command next year.
Faced with a likely rise in interest rates and bond yields, investors have become more discerning in their choices. Instead of having to chase racy tech companies at elevated valuations, they will start to put more money to work in previously uninspiring bond markets. These might not have the appeal of an IPO, but the steady income is undeniably appealing. Markets are a game of relative attractiveness, and bonds just got a bit more compelling. This has been enough to quell some of the previously rampant enthusiasm for new equity.
While on the face of it this may seem to bode ill for the IPO market next year, lower valuations could prove a healthy step change and help quash concerns of a new dotcom bubble. This fear has cropped up regularly in the past few years, but so far these concerns are unfounded.
Yes, some companies got away with market floats that probably did merit the use of the phrase “it’s probably overpriced” for the IPO acronym. Twitter is a classic example. But others deserved their success.
Technology will continue to lead the way in terms of the headlines, but beyond this the consumer goods and financial sectors will remain areas for new issues to attract investors. Household spending continues to look robust around the globe, helped by a rise in wages in the US which will provide a further boost to the economic expansion there.
In a world of steadily rising rates, IPOs will not be the be all and end all of investment. But good companies, attractively priced, will still command attention and deserve some of the enthusiasm showered on them. Like the stock market more generally, it is no longer possible merely to buy any issue in the expectation it will rise eventually. But 2019 will still see some big names come to market, calming fears of an end to new issues.