Rising IPO Market in the U.S. and its Impact on the Secondary Market

The Initial Public Offering (IPO) market has been showing positive signs worldwide. These signs became particularly evident as several successful companies were planning their IPOs in 2019, contributing to the recovery of the previously sluggish stock markets.

Downward IPO Market Tendencies in 2015 and 2016

The number of corporations undergoing IPOs increased in 2017 by 55 relative to the 2016 level, as well as the decline in the preceding two years. The total number of IPOs has reached 105 in 2016, resulting in the steepest stock price declines since the post-recession year 2009. In comparison, only 20 companies underwent IPOs in 2009. At the same time, it is vital to note that 21 companies, having experienced IPOs in 2016, were operating in the technology sector. The shares of these companies have shown a 50 percent stock price increase following the offering.

The number of IPOs in the tech sector increased by 85 percent in 2017. The number of offerings with the values exceeding $40 million has been more than 100 in 2017. The total equity value raised through tech IPOs has been $25 billion in the same calendar year. It is possible to assume that the success rate of the tech IPOs in 2016 has contributed to the higher frequency of IPOs in 2017. The outcome has been overwhelmingly positive for the firms in the sector. The only examples of the companies trading below their IPO price were NantHealth and SecureWorks in 2016, as well as Snap and Blue Apron in 2017.

Essentially, the decline in the number of IPOs in 2015 and 2016 has not reached the low levels of 2001-2003. The number of IPOs has reached 84, 70, and 71 in 2001, 2002, and 2003 accordingly versus 170, 105, and 160 in 2015, 2016, and 2017.

Tendencies Reflecting IPO Market Recovery

Soliton Inc. and Super League Gaming were amongst the first tech IPOs in 2019, followed by the recognizable and mainstream corporation Lyft. The latter company remained private for seven years before deciding to go public with a total raised funds of almost $5 billion. Recently the company has shown spectacular growth in price as the stock soared 33.6% since the mid-May low, but it stays 14.3% below the IPO price of $72.

According to Bloomberg, industrial corporations were the best performers before the 2015-2016 period, as technology companies were the mid-performers, and the energy companies remained at the bottom in terms of stock price performance. The share of the technology companies undergoing IPOs has fallen from 12 percent in 2014 to 8 percent in 2015, suggesting maintenance of their private status in these years. However, the trend is reversing in recent years.

Recovery and Growth in 2018 and 2019

Spotify has decided to go public through a direct listing on the New York Stock Exchange in April 2018. The company valuation has reached $26.6 billion. Such a move could become a trigger for the other tech companies in terms of going public. Pivotal Software has decided to proceed with an IPO in 2018 at an initial price of $15 per share, ending the first day of trading at $15.73. Docusign was able to attract $29 per share during its IPO with the share price increasing by 35 percent in the first day. Several large companies were considering to go public in 2018, including Palantir Technologies, Buzzfeed, Ancestry.com, as well as Airbnb. Uber finally underwent its IPO in May 2019, as the company’s price has adjusted downwards; only recently it has cracked the ceiling of $45 per share.

Secondary Market Impact

The direction of the secondary market was particularly peculiar in light of the IPO market recovery. The secondary market remained essential for the companies remaining private and seeking funding from the investors trading privately. Public status of the largest companies may change the direction of the secondary market in the future.

The success rate of the technology unicorns confirms the credibility of the secondary market, as well as its ability to recognize the potential of the firms. Therefore, the strong performance of the tech firms following their IPOs in 2018 will contribute further influx of funds for startups and other growing firms. The investors will be seeking ownership in the potentially successful companies prior to their public status, expecting higher returns. The scale and performance of the future IPOs will reflect the interest of the investors in the companies before their IPOs, resulting in the growth of the secondary market.

It is also vital to consider the Spotify phenomenon. The company was facing allegations of violating ethical standards when joining the secondary market. The direct listing on the NYSE was novel in essence. The IPO process of Spotify did not involve underwriting limiting the profits of the major financial institutions. Instead, the company has sold approximately 7.8 million of its shares in the secondary market. The total number of shares issued by Spotify has reached 10 million in the most recent quarter, suggesting that it has no intention to issue additional shares. Such an approach of accessing the secondary market before the IPO might be beneficial for the firms from the standpoint of reducing volatility during the early trading stages.

The projections for 2016 signaled the secondary market expansion for unicorns like Spotify due to the longer times needed for the IPO process. Indeed, the market started growing in 2008 and peaked in 2017, according to the charts above. In fact, the trends reflected further growth: the pre-IPO market has skyrocketed 26-fold from $3 billion in 2002 to $79 billion in 2018.