Third Quarter IPO Activity Eases, But Upward Trend Persists

After the strong surge in IPO activity in Q2, the third quarter saw a pullback in the number of initial public offerings on U.S. exchanges. There were 69 IPOs in the third quarter compared to 78 in Q2, an 11.5% dip; however, third quarter activity was up 38% from the 50 companies that IPO’d in the third quarter of 2017. As shown in the chart below, the pace of IPO’s continues its rather bumpy upward trend following the dismal performance in Q1 2016. Year-to-date, we’ve already seen 202 IPOs, making it likely that the 2018 total will surpass the 229 IPOs we saw in 2017.

In terms of gross proceeds, the third quarter of 2018 saw a second consecutive quarterly decline. Gross proceeds from IPOs totaled $15.0 billion for the quarter, down 13.9% from the previous quarter but up a whopping 83.7% from a year earlier. Still, given the strength of Q1 and Q2, IPOs have already generated $51.2 billion so far in 2018, ahead of the total gross proceeds raised in all of 2017 ($50.9 billion).

Trend Toward Bigger Public Offerings

Although offerings in Q3 were on average smaller than we saw in Q1 and Q2, we’re still seeing a continuation of the overall trend toward larger public offerings that began in 2017. In Q3, gross proceeds from IPOs averaged $218 million, just below 2017’s annual average of $222 million. In Q3, IPOs with gross proceeds of between $100 and $500 million represented 45% of all IPOs, while 11.6% of IPOs raised more than $500 million. For the quarter, there were three IPOs that raised more than $1 billion; so far in 2018 we’ve already had nine of these mega-IPOs. This makes 2018 the best year for mega deals since 2014, when we saw 18 IPOs with gross proceeds over $1 billion for the entire year.

Five Largest IPOs in Q3 2018

Source: FactSet

Finance Sector Led in Q3 2018

Of the 69 initial public offerings in the third quarter, 23 came from the Finance sector, the highest representation of any sector. The sector also raised the most money, with gross proceeds of $5.1 billion, representing one-third of total funds raised in the quarter. The second most prolific sector was Health Technology with 21 IPOs for the quarter; however, these IPOs were smaller than average, raising just $1.9 billion.

IPOs by Sector (Ranked by 3Q 2018 volume)

Source: FactSet

Financial Sponsors Remain Active Participants

In 2017, just 43.2% of IPOs priced on U.S. exchanges were backed by financial sponsors, i.e. private equity or venture capital firms. However, in the first three quarters of 2018 more than half of IPOs were financial sponsor-backed IPOs. In Q3, the share was 46.4%. In terms of capital raised, financial sponsor-backed IPOs represented 47.6% of total gross proceeds in the third quarter of 2018. Year-to-date, they represented more than half of the money raised.

There were 25 venture-capital backed IPOs in the third quarter, down from 38 in the previous quarter. Most were smaller offerings (raising less than $300 million), with two notable exceptions: Pinduoduo, Inc. (priced on July 25, raising $1.6 billion) and Farfetch Ltd (priced on September 20, raising $885 million). These two companies ranked in the top five IPOs of the quarter. As a result, gross proceeds for the quarter totaled $5.2 billion, making it second biggest quarter for VC-backed IPOs (after Q2 2018) in terms of money raised in four years. With 80 IPOs raising $16.6 billion so far in 2018, VC-backed IPO activity is already running ahead of 2017.

There were seven private equity-backed IPOs in the third quarter of 2018, down from eight in the second quarter. The biggest PE-backed offering of the quarter was the IPO of global real estate services firm Cushman & Wakefield Plc, which priced on August 3 and raised $765 million.

IPO Highlights and Trends

2018 was supposed to be a boom year for tech IPOs. We saw IPOs from a few big names early in the year, including Spotify (direct issue), Zuora, and DocuSign. These stocks performed well over the summer, but October has taken its toll. Following post-IPO surges in the range of 30-85%, the price of Spotify is currently up 9% from its debut, DocuSign is showing a 20% increase, and Zuora is up just 3%. The recent market weakness has translated into disappointment for third quarter tech IPOs. Eventbrite (priced September 19, raised $230 million) is down 19% since its IPO just a few weeks ago, while Survey Monkey (SVMK, priced September 25, raised $207 million) has dipped by 26%.

This year is proving to be a big one for Chinese (China and Hong Kong) companies to list on U.S. exchanges. In the first half of the year, 16 Chinese companies had IPOs on U.S. exchanges; in the third quarter, there were 11 more. This brings the year-to-date total to 27, ahead of the 24 companies we saw in 2017. Last year, Chinese company IPOs in the U.S. raised a total of $3.9 billion; so far in 2018, they have raised $7.2 billion. A staggering two-thirds of the YTD 2018 total was from three mega-IPOs, two of which took place in Q3: iQIYI (priced March 29, raised $2.3 billion), Pinduoduo, Inc., and NIO, Inc. (priced September 11, raised $1.0 billion).

Performance for these companies’ stocks has been mixed. Shares of iQIYI performed very well in the three months following its IPO, surging by 184%. Although the price has since retreated, the stock remains up 67% from its debut. Pinduoduo hasn’t performed quite as well, with its stock down 22% since its IPO. NIO only debuted a month ago and is currently up 20%.

Looking ahead at future IPOs, there are 25 companies that released initial preliminary filings in 2017 and are still in registration (this excludes offerings that have been postponed or withdrawn). In addition, another 82 companies have released their initial preliminary filings so far in 2018 and remain in registration. Of the companies that have filed in 2018, the pipeline is dominated by the Health Technology and Finance sectors, continuing the recent trend. However, the market declines we have seen so far in October may put a damper on IPOs for the fourth quarter.

Note: All statistics are based on FactSet data for IPOs priced during the specified period for companies going public on exchanges in the United States.