Taking a company public used to be an aspirational target for many company founders. Not only was it seen as a symbol of status, but it was also a way for shareholders to realise value, provide access to abundant sources of growth capital and help attract and incentivise talent. However, since the dot-com bubble came to an end in 2001, the number of US initial public offerings (IPOs) has decreased significantly. This is despite strong performance of the S&P500 index, a key barometer of the health of public equity markets, particularly over the last decade.
While companies are still deciding to enter public markets, the characteristics of what constitutes an IPO candidate have changed considerably. In short, companies are choosing to go public later in their life cycle when they are at a far larger scale. In the two decades prior to the year 2000, the average median age of IPO candidates was relatively stable at approximately 7.7 years but has since increased to 11.6 years, peaking in periods of economic distress (post the dot-com bubble 2001-2 and post-GFC 2008-9) at 15 years. The average size of a company going public has increased to over $1.2b, up from $518m in the decade to the year 2000, while the average amount of funding raised has more than quadrupled over the same period to $247m.
There are a multitude of reasons as to why companies are choosing to defer their IPOs, but key among their considerations are the following:
Life as a listed company is expensive. In addition to significant upfront restructuring costs, legal, accounting and underwriting fees, the ongoing costs of being a listed company in the US is estimated at upwards of $1m per annum. While increased regulation and disclosure is not necessarily a bad thing, the associated costs represent a material sum of money that could otherwise be reinvested by the company into growth initiatives. As such, companies are preferring to go public when they are at a larger scale and the associated costs are more manageable.
Short term pressure
With quarterly reporting and continuous disclosure requirements, public companies face far greater scrutiny than their private market counterparts. The constant pressure to meet quarterly performance targets can skew decision making towards short term thinking rather than long term value creation. Where possible, company founders are eschewing public markets and these pressures until their companies are more mature and they are further advanced in delivering their vision.
Perhaps the greatest influence on companies choosing to delay IPOs is the abundance of capital available in private markets. What was traditionally the realm of venture capital funds, has seen an influx in funding from private equity, hedge funds, family office and other sophisticated investors. Part of the reason for introducing the Jumpstart Our Business Startups (JOBS) Act in 2012 was to encourage more companies to go public by making the process easier and allowing them to test the waters by filing confidentially. However, some argue that the legislation has equally encouraged the opposite by among other things, allowing companies to have up to 2,000 shareholders (up from 500) before requiring registration with the SEC. With more and more investors raising capital to deploy in private markets, it is likely the trend of companies tapping into this capital rather than through public markets will continue.
Near term outlook
While companies are flourishing in private markets, an IPO is still an attractive exit route once a certain size and maturity are reached. With the strongest start to the year for US IPOs since 2014, particularly for technology stocks, it is likely that more will make the transition to public markets. According to CB Insights, as at 30 April 2018, there were 237 private companies worth more than $1b with a total cumulative value of $810b. While all are at differing stages of maturity and readiness, this represents a strong pipeline for future IPO candidates.
Source: Initial Public Offerings: Updated Statistics, 17 January 2018, Jay R. Ritter, S&P Capital IQ
Note: IPOs only include companies with an offer price of at least $5.00, excluding ADRs, unit offers, closed-end funds, REITs, natural resource limited partnerships, small best efforts offers, banks and S&Ls, and stocks not listed on CRSP (CRSP includes Amex, NYSE, and NASDAQ stocks).