As we continue to see a shift in asset allocation from public markets to private markets in the U.S., asset managers, investors, and policymakers are paying more attention to how, when, and which companies submit an IPO each year.
Over the last few years, we’ve seen private companies interested in entering the public market seek alternatives to expensive underwriters in the form of direct listings and Special Purpose Acquisition Companies (SPACs). In a previous article, FactSet highlighted that the boom in SPACs continued to drive a surge in U.S. IPOs into early 2021.
In late December 2020, the Securities and Exchange Commission (SEC) knocked down a major barrier for private companies looking to submit an IPO through its approval of NYSE’s direct listing plan, which allows private companies to raise capital in a direct listing for the first time and sell shares directly to investors. Slack and Spotify made headlines in recent years when they chose the unique path to conduct an IPO via a direct listing. While their direct listings allowed them to circumvent high underwriter fees required for a traditional IPO, they could not concurrently raise capital. Now, private companies can leverage direct listings to raise capital and enter the public market without needing to weigh the high cost of an underwriter.
By making direct listings even more attractive, the SEC ruling may have opened the door for an influx of IPO activity going forward. This ruling also offers a fresh context to investigating the overall reduction in IPOs in the last few decades. Morgan Stanley explored the growth of private markets over a 40-year period and identified a decline in IPO activity as one of many drivers that have led to a decrease in the number of public companies in the U.S. This research found “there were 282 IPOs per year on average from 1976 through 2000 and 115 from 2001 through 2019.” It also pointed to the high cost of IPOs as a key factor for why companies choosing to make an IPO are now larger and typically older.
Here we leverage PrivCo’s U.S. Private Company Financials and Intelligence data feed for a closer look at U.S. IPOs over the last eight years and overlay FactSet’s RBICS sector classifications. The trend of declining IPOs year over year persists through this period and we can see that Health Care, Technology, and Finance sectors dominated the IPO space, accounting for 72% of all U.S. IPOs over the period.
Data as of January 20, 2021
Even these top three sectors saw an overall decline in IPO volume since 2013. The Finance and Technology sectors exemplify the trend of companies staying private longer, realizing more value as private companies and leading to larger IPOs. For instance, 2020 saw the IPO of Snowflake, an eight-year-old cloud-based data warehousing company with over 260 million in revenue before going public. Similarly, GoodRx, a platform offering direct-to-consumer prescriptions, also went public in 2020, nine years after its founding, with about 390 million in revenue for the year pre-IPO.
Data as of January 20, 2021
Health Care, on the other hand, seemingly tells a different story. Even though this sector has seen the highest number of IPOs by sector year after year, they tend to be much smaller and the companies much younger. This is driven by Biopharmaceutical companies, which accounted for 279 IPOs since 2013. The median age for these companies is only six years and the median revenue for the year prior to IPO was five million for companies where the information is available. This dynamic is explained by the nature of the Biopharmaceutical industry; companies often pursue IPOs to raise the capital necessary to advance their drugs through clinical trials.
While this brief example helps us identify sectoral IPO trends, we have only begun to scratch the surface of private company analysis possible using PrivCo data. The PrivCo database offers an opportunity to expand on this to understand which companies have chosen alternative exit strategies and why. Will companies that have historically opted for M&A or buyouts decide to enter the public market via direct listing going forward? The recent SEC ruling has altered the cost-benefit analysis that private companies perform when faced with a need for capital. We look forward to watching how the IPO and private market landscape may shift with one less public market barrier to entry.
Disclaimer: This article was originally published on January 20, 2021.
The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.