Was the most recent decade of IPOs as uninspired as some pundits proclaim? How do the twenty-tens measure up against the nineties and the aughts? Turns out that an increase of larger offerings has more than offset the oft-lamented decline in number of deals.
Since 2000, Far Fewer IPOs…
The most frequent lament heard from IPO market observers is there are substantially fewer initial public offerings completed today compared to the dot-com boom of the 1990s. That critique is spot-on. The nineties priced 5,724 initial public offerings during its 10 years, a count that exceeds the IPO count for the next two decades—combined—by 1,455 offerings, or 34%.
The number of IPOs declined 63.2% from the 1990s to the 2000s, and then stayed relatively flat. Interestingly, deal count and volume increased modestly and in tandem in the first two decades of this century: From the 2000s to the 2010s, deal count rose 2.7% (2,106 IPOs for 2000-2009 and 2,163 IPOs for 2010-2019), while deal value increased only 1.9%.
Over the past 20 years, the IPO market has plateaued into a new normal. Those new performance parameters make a return to the heady days of the “internet bubble” unlikely barring a significant change in IPO market dynamics. So how unlikely is unlikely? The odds that IPO counts return to late 1990s levels seem only slightly better than Alta Vista rising from its grave at Yahoo! (now Verizon Communications) to best Google’s search or the defunct Pets.com sock puppet, his microphone ever firmly in hand, returning to host his own late-night television show. Perhaps it is unwise for investors to long for a return to a time characterized by “irrational exuberance.” Then again, the stock market has already been partying like it’s 1998.
…But Average and Cumulative Deal Value Has Grown
The significantly reduced deal count in recent decades has not dampened the number of dollars raised in public offerings—in fact, investors continue to put more into newly public companies. The value of deals increased from $482 billion in the 1990s to $569 billion for the 2000s, an increase of nearly 18%. Over the last decade, deal value growth slowed, rising only 1.9%.
Analysis of these completed deals evidences four notable trends:
(1) The number of small IPOs (under $100M) has shrunk tremendously;
(2) Deals in the $100M-$500M range have become the new small, eclipsing the under-$100M deal segment of the market;
(3) Surprisingly, the near-top range of $1B-$10B has shrunk, decade-over-decade; and
(4) Not surprisingly, the number and percentage of the largest deals ($10B+) has increased considerably in the last 10 years.
Technology and Communications Deal Counts Fade, Diversified Gains
Consumer, non-cyclicals and financials still rule the industry sector IPO count, but their lead over other sectors has narrowed. Communications and technology counts have both taken it on the proverbial chin since the 1990s, each dropping precipitously. Diversified has been the best-performing sector for IPO deal counts over the past 30 years, increasing from 13 in the 1990s to 64 in the 2000s, then finishing with 142 IPOs in the last decade. Not only does no other sector come close to that performance level, but energy is the only other sector whose sector performance in the 2010s bests either prior decade. Further, only diversified, energy, and consumer, non-cyclicals increased their IPO counts from the 2000s to the 2010s; the communications, financial, industrial, and technology sectors all produced fewer IPOs over that period.
Life sciences, a component of consumer, non-cyclicals, has grown from 321 IPOs in the 2000s to 581 in the most recent decade, an 81% rise. For perspective, that figure remains below the 727 total life sciences deals in the 1990s.
Sector IPOs Return Mixed Deal Volume Results
The value of technology and financial IPOs completed in the last decade exceeded the value achieved by those sectors during the tech-heavy 1990s, though each fell short of matching their 2000-2009 values. Falling under the radar of many has been the standout performances posted by the energy and diversified sectors. This may owe to their smaller total deal values, compared to sector leaders.
Communications continues to post very substantial dollar value totals for its IPOs, albeit on a deal count that fell from 828 in the 1990s to only 194 deals in the last decade, a staggering decline of 77%. Enormous IPOs by ride-sharing companies Uber and Lyft, both classified as communications companies, no doubt aided the sector’s value totals.
The charts below present industry sector deal value on a sector-by-sector basis to better illustrate the performance of each:
Life sciences’ trajectory is a close reflection of consumer, non-cyclicals—a sector of which it is a component. As one might expect in our services-oriented, post-industrial economy, the performance of the industrials sector over the last 30 years is the most concerning.
SPACs Take Flight, Soaring Ever Upward
Special purpose acquisition companies, commonly referred to as SPACs, are a type of blank check company invented in the early 1990s “created specifically to pool funds in order to finance” an unspecified merger or acquisition opportunity, usually within 2-3 years. The reputation of blank check companies became sullied by scandal in the early 1990s, most often owing to fraud in penny stocks. In 1992, the SEC enacted Rule 419 to impose restrictions on blank check companies, most notably mandating creation of an escrow account for the holding of an offering’s gross proceeds. Those new anti-fraud rules, combined with the re-branding of many blank check companies as SPACs and their generally strong results under experienced, professional managers, have largely rehabilitated the category’s reputation.
The popularity of SPACs has increased spectacularly over the past 20 years and now represent about 20% of the IPO market. SPAC IPOs raise capital not for an existing business but rather for the acquisition of an established business in the industry sector described in its offering documents. The 1990s saw only one SPAC IPO completed with a deal value of $9 million. During the 2000s, the number of SPAC IPOs grew to 181, totaling nearly $25 billion in deal value. Growth in SPAC IPOs continued during the 2010s, finishing the decade with 234 deals on a combined value of $47 billion. Signs point to continued growth for SPAC IPOs in 2020, even as the overall IPO market appeared to slow in late 2019.
IPOs in the Twenties and beyond
The US economy is in a period of unprecedented sustained growth, having completed the entire 2010s without a recession. The stock market has similarly performed better and for far longer than almost anyone anticipated was possible. The appetite for initial public offerings moderated somewhat in 2019 as investors grew more discerning. Each successive public offering filed by an overvalued, unprofitable unicorn (e.g., Uber and Lyft) drove mounting scrutiny from investors, culminating in the withdrawal of WeWork’s much-maligned proposed monster offering.
The SEC is sure to continue its efforts to encourage more IPOs in the coming years. Despite that aim, the Commission cannot achieve this goal without changes to strong market trends—trends that are largely beyond the Commission’s power to affect. Increasingly demanding investors, a decided movement in favor of private over public companies, and a recent proposed IRS rule change eliminating a period of transition on executive pay for newly public companies all seem likely to keep the IPO market from returning to the kind of frothy activity that companies and investors enjoyed in the nineties.