The wild swings of the stock market have sucked the momentum from Alibaba’s world-record-smashing public debut earlier this fall, bringing the IPO market to a crawl and possibly ending a hot streak that was expected to continue through the end of the year.
Since mid-September, when IPO activity peaked with the help of Alibaba’s $25 billion deal, 29 companies, including four from the Bay Area, have withdrawn or postponed their initial public offerings, according to market intelligence firm Ipreo. One-third of all withdrawals or postponed deals since the start of the year have occurred in the last month, and many more companies that had been considering an IPO but hadn’t yet filed are now biding time until Wall Street recovers from its most volatile stretch since 2011.
“Square, Uber — those people are saying ‘We’re in no rush. We’ll wait to do it until it feels right,’” said Brendan Connaughton, chief investment officer and partner at ClearPath Capital Partners in San Francisco.
The abrupt halt is an unexpected reversal of market momentum that has put 2014 on pace to be the biggest year in at least a decade for IPOs, both in terms of the number of deals and proceeds from those deals, according to market data firm Renaissance Capital. That record will still be reached even with the current market jitters, but the cool-down caught investors by surprise — many had been predicting a busy and lucrative fourth quarter — and has raised concerns that the five-year bull market that has lifted stocks and made many tech company founders and shareholders wealthy with big-dollar IPOs is nearing its end.
“I think 2016 and 2017 could be very different,” Connaughton said. “There’s going to be some hole that we’ll step into and we’ll see a meaningful capital markets and public markets correction.”
For the average mom-and-pop investor and employees with a 401(k), the IPO slowdown, if it lasts, could become a financial headache. Mutual fund managers and institutional investors have invested increasingly in private companies, and especially tech companies, as an alternative to low-interest U.S. government bonds, often capturing a big return once those companies go public. But as the IPO market sputters, some experts say those returns will dwindle.
“Your mutual funds, your 401(k)s, your larger pension plan, they could potentially suffer, because there aren’t a lot of returns on investment right now,” said Alan Jones, a partner and leader of IPO advisory services at consulting firm PricewaterhouseCoopers.
The precipitous market moves over the past month — triple-digit swings in the Dow Jones industrial average in a single day — were triggered by fears that Europe, including economic powerhouse Germany, could be heading into a recession; the global economic impact of the Ebola outbreak; and a weakening Chinese economy, experts say.
“When the market is bouncing around, investors don’t want to take risks,” Jones said. “They will not bring a company to a volatile market.”
Even with mounting unease about the global economy, hopes were high that the market would keep chugging along with help from Chinese Internet powerhouse Alibaba. The company’s colossal IPO in September was expected to open up a torrent of deals, with smaller companies leveraging Alibaba’s energy and excitement to make their own public market splash. But that momentum didn’t last, some experts say, because Alibaba ended up draining some key investors’ attention and money.
The volatility has started to calm slightly, market watchers say, but with upcoming central bank meetings that will review economic policies, and a lineup of earnings reports from market-moving companies, the situation is still dicey. Companies “will make the go or no-go decision on a week-by-week basis, depending on what’s going on in the overall market,” said Lise Buyer, a partner at Class V Group in Portola Valley and an IPO adviser who guided Google’s 2004 offering.
“Anything that is positive will give momentum to the IPO market,” added Jackie Kelley, a partner and IPO markets leader at accounting firm Ernst & Young. “Let’s just keep our fingers crossed and hope things go well these next few days.”
Companies that have dared the market have also risked taking a beating. Of the 25 companies that have gone public this month, about half priced shares below the range set in their IPO filing. The combined $5.5 billion raised from these deals is less than half of the IPO proceeds raised in October 2013, and less than one-fifth of the proceeds raised during last month’s IPO bonanza, according to Renaissance Capital.
Some experts, however, caution against too much worry. The market may appear disconcerting only because it’s the first true bout of volatility in a year and a half, and IPOs have enjoyed an unusually long stretch of ideal conditions, said Brett Paschke, head of capital markets for financial services firm William Blair.
Read more: Wild market swings slow IPO momentum