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U.S. IPO Market: Lyft and Levi Strauss Were the Only Bright Spots in a Weak First Quarter

Economics

By Sara B. Potter, CFA  |  April 10, 2019

While 2018 was a solid year for initial public offerings on U.S. exchanges overall (274 IPOs), the slowdown in activity we saw in the fourth quarter of last year continued into early 2019. The 34-day U.S. government shutdown (Dec. 22, 2018 - Jan. 25, 2019) certainly had an impact on IPO activity to start the year. During the shutdown, the Securities and Exchange Commission (SEC) was closed, essentially bringing IPO activity to a halt. With the SEC only able to perform very basic market functions with a limited staff during the shutdown, no one was available to give feedback to companies planning to IPO.

Following the shutdown, enthusiasm seemed to return to markets. After just five IPOs in January, we saw a wave of 18 companies IPO during February. However, we saw a retreat in March, with just 11 companies going public. But March featured two big names: Lyft (priced March 28, raised $2.3 billion) and Levi Strauss (priced March 20, raised $623 million). Lyft had the biggest market debut since last year’s AXA Equitable Holdings offering (priced May 10, 2018, raised $2.7 billion), and optimism remains high for more big tech IPOs in 2019, including names like Uber, Pinterest, Slack, and Airbnb.

Q1 2019 IPO Activity is the Weakest in Two Years

There were just 34 IPOs in the first quarter, down 41% from the 58 companies in Q4 2018 and 40% lower than Q1 2018. In terms of volume, the first quarter saw the worst quarterly performance since Q1 2017; for money raised, it was the worst quarter since Q2 2016. Gross proceeds from IPOs in the first quarter totaled $7.4 billion, down 34% from the previous quarter and 61% from a year earlier. Just two IPOs raised more than $500 million, Lyft and Levi Strauss, the lowest number since Q1 2016 when one company met this threshold. The average money raised for the quarter was $218 million but excluding Lyft the average was just $154 million.

Quarterly IPO Activity

Size of IPOs

Finance and Health Technology Sectors Lead Q1 2019 IPO Volume

Of the 34 initial public offerings in the first quarter, 12 came from the Health Technology sector and 13 from the Finance sector. This is a continuation of the trend we saw in 2018, when Finance sector IPOs led all sectors, and Health Technology was a close second. First quarter IPOs in Health Technology were smaller than average, raising an average $111 million, with the sector only seeing total gross proceeds of $1.3 billion. At the same time, Finance sector IPOs raised a total of $2.5 billion, with an average size of $189 million.

Thanks to the Lyft mega-IPO, the Technology Services sector led all sectors in terms of total money raised ($2.4 billion). The average IPO size for this sector was $812 million, followed by the Consumer Non-Durables sector with $623 million, a number based solely on the Levi Strauss offering.

IPOs by Sector (Ranked by 1Q 2019 volume)

 

Number of IPOs

Gross Proceeds (Mil. $)

 

1Q 2019

2018

2017

1Q 2019

2018

2017

TOTAL

33

274

229

$7,427

$63,471

$50,908

Finance

13

87

76

$2,450

$21,483

$18,229

Health Technology

12

82

47

$1,334

$8,148

$4,448

Technology Services

3

40

20

$2,437

$13,231

$8,576

Consumer Durables

1

7

5

$25

$1,522

$660

Consumer Non-Durables

1

2

4

$623

$23

$352

Health Services

1

2

1

$4

$391

$138

Industrial Services

1

8

9

$292

$1,601

$3,049

Miscellaneous

1

4

8

$260

$1,072

$818

Non-Energy Minerals

1

1

3

$2

$13

$1,683

Commercial Services

0

10

15

$0

$5,846

$1,937

Communications

0

1

1

$0

$3

$357

Consumer Services

0

3

4

$0

$511

$2,538

Distribution Services

0

0

4

$0

$0

$376

Electronic Technology

0

4

5

$0

$382

$269

Energy Minerals

0

2

4

$0

$289

$1,263

Process Industries

0

3

3

$0

$2,139

$1,384

Producer Manufacturing

0

6

8

$0

$2,177

$1,594

Retail Trade

0

8

7

$0

$3,359

$1,298

Transportation

0

3

4

$0

$950

$1,596

Utilities

0

1

1

$0

$330

$345

Source: FactSet

Activity by Financial Sponsors Slows

There were 12 venture-capital backed IPOs in the first quarter, the lowest quarterly number in two years. There were no private equity-backed IPOs in Q1 2018; the last time this happened was Q1 2016. Gross proceeds for VC-backed offerings totaled $3.6 billion, slightly ahead of the $3.4 billion raised in Q4 2018. However, the total was inflated by the Lyft offering. Excluding Lyft, the total money raised was just under $1.3 billion and VC-backed IPOs averaged just $115 million in size.

VC backed IPOs

IPO Market Trends

Forget FAANG (Facebook, Amazon, Apple, Netflix, Google). The next generation of tech stocks to watch have a new acronym: LUPA (or PAUL). LUPA stands for Lyft, Uber, Pinterest, and Airbnb. The recent Lyft IPO is just the first of these highly anticipated 2019 IPOs. Pinterest filed its papers in March and is projected to go public in April. Uber and Airbnb are expected to IPO in the coming months, as are Palantir Technologies and Slack. Slack appears poised for a direct listing this summer, following the example of Spotify, which last year eschewed the traditional IPO route via Wall Street underwriters and listed its shares directly. Even though few of these hot company names are actually profitable, investors are expected to flock to these offerings largely for FOMO (fear of missing out) on the hot tech trend.

Nevertheless, investors are cautiously watching the post-IPO performance of Lyft. Although the shares were initially priced at $62-68, the range was raised to $70-72 due to high demand leading up the offering. On IPO day, the stock was priced at the top end of that higher range, $72, and closed on the first day of trading at $78.29, an 8.7% increase. However, the stock dipped 11.9% to $69.01 the following day. Most recently, the stock closed at $67.44, down 6.3% from its initial offer price.

Over the last few years we’ve seen a surge in Chinese (China and Hong Kong) companies listing on U.S. exchanges; however, this activity has slowed to a crawl in 2019. According to FactSet data, 44 Chinese companies IPO’d in the U.S. last year; so far in 2019, just six have done so (four in Q1 and two in April). It’s not just the number of Chinese IPOs that has contracted; the offerings have been much smaller in size than we saw last year. The six IPOs of 2019 have raised a total of just $360.7 million, a far cry from the $9.7 billion raised last year, which included four mega-IPOs.

Three-quarters of the Chinese companies that IPO’d on U.S. exchanges in 2017 (18/24) are now showing negative total returns compared to their offer prices; this is true for nearly half (18/44) of the Chinese companies that went public in 2018. This poor performance is likely one reason for the slowing activity in 2019. There are also growing incentives for Chinese companies to IPO locally. The Hong Kong exchange’s recent easing of rules is encouraging more companies to consider an IPO there. In addition, the new Science and Technology Innovation Board in Shanghai with its looser listing restrictions is expected to convince Chinese tech companies to IPO within China rather than on U.S. markets.

IPO Activity Reflects the Market Environment—What Does This Mean For 2019?

Looking ahead at future IPOs, there are 47 companies that released initial preliminary filings in 2018 and are still in registration (this excludes offerings that have been postponed or withdrawn). In addition, another 33 companies have released their initial preliminary filings so far in 2019. The combination of market volatility at the end of 2018 and the extended government shutdown to start 2019 likely postponed IPO plans for many companies. With U.S. markets approaching their all-time highs, things look promising for Q2 and the rest of 2019. However, there are looming risks for global markets, including Brexit and trade issues, which could lead to more market uncertainty.

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.

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Sara Potter, CFA

VP, Associate Director, Thought Leadership and Insights

Sara Potter joined FactSet in 1999 and is based in Norwalk. She is responsible for developing applications that facilitate the analysis of global markets at a macro level, highlighting FactSet’s vast benchmark and economic content sets. Sara has also managed the economic database development team where she was responsible for the integration of third-party economic content as well as the development of FactSet Economics data. Sara earned a M.A. in International Economics and Finance from Brandeis University and holds a B.A. in Economics and French from Dartmouth College. She is a CFA charterholder.

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