For initial public offerings, particularly those of technology companies, the second half of 2015 got off to a slow start and the pace has continued to be sluggish into December.
With markets troubled by the economic slowdown in China, prolonged Eurozone instability, falling energy prices, and for technology companies, record high latestage private company valuations (as evidenced by the recent mutual fund mark-downs of "unicorn" investments), investors have become increasingly leery. Equity investors are also on edge as the Federal Reserve gradually moves away from the near-zero interest rate policy that partly fueled a six-year stock market rally.
As we have seen during the second half of this year, companies entering the public markets must withstand heightened scrutiny from skeptical investors, as well as what many fear will be prolonged turbulence in the global stock markets. Companies like Square, which debuted in 3Q 2015, are expected to show impressive metrics just to maintain their private market valuation, a challenge that many companies have been unable to meet. We are also seeing signs that the availability of capital has begun to dry up for heavily funded, late-stage companies with valuations of over a billion dollars. With the gap between private and public market valuations widening and public market investors demanding greater discounts in IPO valuations than before, the question is whether VCs will be willing to hold out for a more opportune time to take their most promising portfolio companies public. The significant valuations and large pools of capital available in the private funding markets had caused some of the higher profile IPO candidates to avoid the scrutiny and volatility of the public markets, but with late-stage capital available on increasingly less company-friendly terms into Q4 2015, it remains to be seen what the ultimate impact will be on the IPO markets over the coming quarters.
3Q 2015 saw the VIX Volatility Index rise to its highest level since October 2011, and the IPO market entered 4Q 2015 with the poorest returns since 3Q 2011. With the IPO window opening and closing rapidly, companies should position themselves to launch quickly when the timing is right. Issuers are working especially closely with their underwriters and board to assess timing and pricing strategies in this tumultuous environment. In the meantime, companies are also considering a variety of other options, including exploring an M&A exit on a dual track with IPO preparations, which we discuss at length in our feature article of this edition. Even with the M&A alternative vying for attention, the rate of M&A will likely be insufficient to serve as a source of liquidity for the most highly valued, large-scale private tech companies, as strategic acquirers will in many cases be put off by the most recent private market valuations and unwilling to take on high monthly losses. As a result of these factors, the pipeline of IPO-ready tech companies continues to grow, with numerous companies in confidential submission hoping, as we do, that market conditions will improve in 2016.
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