IPO Market Has Never Been This Forgiving to Money-Losing Firms
Comment of the Day

October 03 2018

Commentary by Eoin Treacy

IPO Market Has Never Been This Forgiving to Money-Losing Firms

This article by Corrie Driebusch and Maureen Farrell for the Wall Street Journal may be of interest to subscribers. Here is a section:

The euphoria has powered a surge in new listings. More than 180 companies raised over $50 billion in IPOs in the U.S. in the first three quarters, putting 2018 on track to be the busiest year for new issuance by both measures since 2014, according to Dealogic. That year, IPOs jumped thanks in part to Alibaba Group Holding Ltd.’s $25 billion offering as well as a surge in biotech companies going public.

This past Wednesday, online-survey provider SurveyMonkey’s parent SVMK Inc., which hasn’t had a profitable year and posted a $24 million net loss in 2017, jumped more than 40% in its debut after pricing above its targeted range. Shares of Tilray Inc. an unprofitable Canadian cannabis retailer that is one of the few pot companies listed in the U.S., soared more than 800% since its Nasdaq debut this summer.

Meanwhile, biotechnology company Solid Biosciences Inc., which hadn’t yet generated revenue—let alone earnings—informed the market ahead of its January IPO that one of its clinical trials was put on hold. Investors ignored that potential red flag and the company raised $144 million. Its stock has nearly tripled since then.

Eoin Treacy's view

It’s a good time to list a company. Interest rates are not so high as to inhibit risk appetites. Financial conditions are still accommodative. The world’s largest economy is “almost too good to be true” in the words of the Fed chair and investors are chasing growth because the returns on value have been lacklustre.

China’s tech sector has also been accelerating the pace of IPO traffic  with some very large household name companies coming to market this year. While it is not unusual for biotech companies to come to market with no revenue, if they have positive clinical trial data, the question investors should probably be asking is if companies are so eager to sell, en masse, then should we be so eager to buy?

There are two considerations that immediately spring to mind. IPO companies are using the current benign environment to gain access to capital at rates which are historically still among the cheapest on record, why wouldn’t they?

For China’s IPOs founders have the additional consideration of raising capital now before the state takes a controlling interest in the management of the company. That is a significant motivation for Jack Ma in seeking to list Ant Financial.   

The Renaissance IPO ETF has been trending higher in a consistent manner since early 2016 and pulled back rather sharply yesterday to test the region of the trend mean. It will need hold that level if the trend is to remain consistent.

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