April IPO Market Update: Turnaround In Sight

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Includes: BATS, IPO, UBER
by: Don Dion

Summary

2016 worst year for IPOs since 2009, with only eight offerings during the first quarter in the U.S.

Wild swings in the health and tech sectors have likely kept some companies on the sidelines, afraid to make public offerings because of market volatility.

There are signs that the IPO markets are getting ready to reopen, including a rebound of the S&P 500 and an increase of 18 percent for the Renaissance Capital IPO.

Investors should watch BATS Global Markets, gearing up for its initial public offering, and Uber, which may soon need to IPO to pay back investors.

First Quarter Worst for IPOs since 2009

The first quarter of 2016 has so far proven to be the worst for IPOs since 2009. In that year, a single company went public with an IPO. Just eight companies, all of which are from the health and biotechnology sector, have made initial public offerings in the U.S. during the quarter. (We've covered these deals and the IPO market sentiment on our IPO Insights platform.)

The volatility of the stock market has also proven to be difficult to IPOs during the quarter. As The Wall Street Journal reported, 70 percent of the companies that made IPOs in 2015 are now trading below their initial valuations. Across all sectors, IPOs have raised $700 million, which is a decrease of 86.7 percent from 2015. The remainder of 2016 also is forecasted to be weak for IPOs. So far, 24 companies have filed publicly for IPOs, which is a decrease of 45.5 percent from 2015.

IPOs on the Sidelines

Wild swings in both the tech and health care sectors have kept many companies on the sidelines so far. With the volatility in the stock market since the beginning of the year, some companies are waiting to make IPOs, fearful that their values will fall if they do so now. Experts also point out that some companies have had issues because the expectations for their valuations were too high. This means that companies that want to make initial public offerings may want to make certain they have attractive valuations in order to draw in investors.

Indicators That IPO Market May Be Turning Around

It's not all gloom and doom for 2016, however. Since the low on Feb. 11 for the S&P 500, it is now up by around 10 percent. Similarly, Renaissance Capital IPO ETF (NYSEARCA:IPO), a fund of about the last 60 IPOs, has risen by 18 percent. Both of these indicators show that the markets are returning in strength, a good sign for IPOs. While the IPO markets have been largely closed since December, the new signs of life indicate they may be opening up again soon. The later part of April is also historically normally a good time for IPOs as well. As has been seen with reopened IPO markets after a drought in the past, they normally tend to do better than the S&P 500 for the successive three-month period.

The Future: What to Watch For

A few companies are rumored to be gearing up for large IPOs in the near future. One of these, BATS Global Markets (BATS:BATS), previously made an application that it then withdrew because of issues. The company plans to issue its IPO on its own exchange, which is set up as a competitor to the New York Stock Exchange. Another company to watch is Uber, which, despite the insistence of CEO Travis Kalanick that the company has no plans to make a public offering, industry experts point out that the company will soon need to do so in order to make certain its private investors will get a good return on their investments.

While 2016 has been terrible so far for IPOs, that could change. To stay tuned to the latest updates, please follow us on Seeking Alpha and our premium research (early analysis in advance of our full articles), IPO Insights.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.