Review

The IPO market produced 142 IPOs in 2017, a total that was 45% higher than the 98 IPOs in 2016 and just shy of the 152 IPOs in 2015, but still lower than the annual average of 155 IPOs over the five year period from 2011 to 2015.

The year started slowly, with 20 IPOs in the first quarter. Activity more than doubled in the second quarter, reaching 45 IPOs. The third quarter saw the pace of new offerings slow, with 27 IPOs—the lowest third-quarter tally in the last five years. The fourth quarter produced 50 IPOs, with November accounting for almost half—the second busiest November since the dot-com era.

Total gross proceeds for the year were $30.51 billion—65% above the 2016 total of $18.54 billion and 21% higher than the $25.17 billion raised in 2015, but 25% below the $40.93 billion average for the five-year period preceding 2016. 

IPOs by emerging growth companies (EGCs) accounted for 87% of the year’s IPOs, up from 84% in 2016 but below the 93% recorded in 2015. Since the enactment of the JOBS Act in 2012, 85% of all IPOs have been by EGCs.

The median offering size for all 2017 IPOs was $120.0 million—27% above the $94.5 million median for 2016 and 22% higher than the $100.7 million median over the five-year period from 2011 to 2015.

The median offering size for life sciences IPOs in 2017 was $79.1 million, 42% above the $55.5 million median deal size in 2016 and 22% above the $65.0 million median for the five year period from 2011 to 2015. By contrast, the median offering size for non–life sciences IPOs in 2017 was $151.0 million—up 15% from the $131.6 million median in 2016 and 10% higher than the $137.7 million median for the five-year period preceding 2016.

In 2017, the median offering size for IPOs by EGCs was $105.0 million, compared to $454.4 million for IPOs by non-EGCs—both tallies representing the highest annual levels since 2012. From 2012 to 2016, the median EGC IPO offering size was $85.9 million, compared to $421.1 million for non-EGC IPOs.

The median annual revenue of all IPO companies in 2017 was $101.4 million, 53% above the $66.5 million median for 2016 and more than two and a half times the $37.8 million median for 2015. IPO companies over the five-year period from 2010 to 2014 had median annual revenue of $92.7 million.

Only 15, or 34%, of the year’s life sciences IPO companies were revenue generating. The median non–life sciences IPO company in 2017 had annual revenue of $212.8 million, a figure only 3% higher than the $205.8 million median for 2016, but 37% above the $154.0 million median over the five-year period from 2011 to 2015.

EGC IPO companies in 2017 had median annual revenue of $61.4 million, compared to $1.93 billion for non-EGC IPO companies. The median annual revenue for non–life sciences EGC IPO companies in 2017 was $151.8 million, 40% above the $108.2 median that prevailed from enactment of the JOBS Act through 2016.

The percentage of profitable IPO companies declined from 36% in 2016 to 34% in 2017. Only two life sciences IPO companies in 2017, or 5% of the sector’s total, were profitable, compared to 11% over the five year period from 2012 to 2016. In 2017, 47% of non–life sciences IPO companies were profitable, down from 54% over the five-year period from 2012 to 2016.

In 2017, the average IPO produced a first-day gain of 14%, compared to 12% for the average IPO in 2016 and 16% in 2015. The average life sciences IPO company gained 13% in first-day trading in 2017, compared to 14% for the year’s non–life sciences IPO companies. This contrasts with 2016, when the average life sciences company rose 6% on its first trading day—less than half the 16% gain achieved by non–life sciences IPO companies.

As in 2016, there was a solitary “moonshot” (an IPO that doubles in price on its opening day) in 2017—down from an annual average of six moonshots between 2013 and 2015. The 2016 and 2017 counts are more in line with the incidence of moonshots that followed the dot com bust, when no more than a pair occurred each year.

In 2017, 20% of IPOs were “broken” (IPOs whose stock closes below the offering price on their first trading day). This figure is down from 24% in 2016 and 26% in 2015, and represents the second-lowest annual level since 2004. In 2017, 25% of life sciences company IPOs were broken, compared to 18% of non–life sciences company IPOs.

The average 2017 IPO company ended the year 32% above its offering price—with the average life sciences IPO company trading 35% above its offering price by year-end, compared to 30% for the average non–life sciences IPO company. This comparison reverses sector aftermarket performance in 2016, which saw the average life sciences IPO company end the year trading 16% above its offering price, compared to 34% for the average non–life sciences IPO company.

The year’s best performers were a pair of life sciences companies, AnaptysBio (trading 571% above its offering price at year-end) and argenx (up 271%), followed by tech companies Roku (up 270%) and SMART Global Holdings (up 206%).

At the end of 2017, 30% of the year’s IPO companies were trading below their offering price—a statistic that included 39% of life sciences IPO companies, compared to 26% of their non–life sciences counterparts. At year-end, 44% of all 2017 IPOs were trading at least 25% above their offering price.
Individual components of the IPO market fared as follows in 2017:

• VC-Backed IPOs: The number of IPOs by venture capital–backed US issuers increased by 28%, from 39 in 2016 to 50 in 2017, while their market share declined slightly, from 50% to 48%. The median offering size for US venture backed IPOs increased by 29%, from $75.0 million in 2016 to $96.8 million in 2017. The median deal size for non–VC-backed companies was $156.0 million in 2017, up 6% from $147.0 million in 2016. The average 2017 US-issuer VC-backed IPO gained 35% from its offering price through year-end.
• PE-Backed IPOs: Private equity–backed IPOs by US issuers increased by 44%, from 18 in 2016 to 26 in 2017. Overall, PE-backed issuers accounted for 25% of all US-issuer IPOs in 2017, compared to 23% in both 2015 and 2016. The median deal size for PE-backed IPOs in 2017 was $233.3 million, compared to $101.8 million for all other IPOs. The average PE backed IPO in 2017 gained 26% from its offering price through year-end.
• Life Sciences IPOs: There were 44 life sciences company IPOs in 2017, an increase of 10% from the 40 in 2016. Although the sector’s market share declined from 41% in 2016 to 31% in 2017—its lowest level since 2013—the 2017 market share compares favorably to the 17% figure over the five-year period from 2009 to 2013. The average life sciences IPO company in 2017 ended the year up 35% from its offering price, compared to a 30% year-end gain for non–life sciences IPO companies.
• Tech IPOs: Deal flow in the technology sector increased by 69%, from 26 IPOs in 2016 to 44 IPOs in 2017. The sector’s market share increased for the second year in a row, reaching 31% in 2017 after rising from 23% in 2015 to 27% in 2016—although the tech sector’s 2017 market share remains well below the 46% it enjoyed in 2011. The average tech IPO ended the year with a gain of 32% from its offering price, compared to 31% for non-tech IPOs.
• Foreign-Issuer IPOs: The number of US IPOs by foreign issuers almost doubled, from 20 in 2016 (20% of the market) to 38 in 2017 (27% of the market). Among foreign issuers, Chinese companies led the year with 16 IPOs (the highest annual number of IPOs from China since 2010), followed by companies from the United Kingdom (four IPOs) and Canada (three IPOs). The average foreign issuer IPO company ended the year trading 19% above its offering price.

In 2017, 55 companies based in the eastern United States (east of the Mississippi River) completed IPOs, compared to 49 for western US–based issuers. California led the state rankings with 25 IPOs, followed by Massachusetts (16 IPOs), New York (13 IPOs), Texas (11 IPOs) and Pennsylvania (five IPOs).

Outlook

IPO market activity in the coming year will depend on a number of factors, including the following:

• Economic Growth: Despite an unexpected slowdown in the fourth quarter of 2017, the US economy grew 2.3% last year—an increase from the 1.6% growth rate for 2016. A strengthening global economy, coupled with the overhaul of US corporate and individual income tax rates in late 2017, may spur higher growth this year, although increasing interest rates and inflationary pressures pose headwinds. Geopolitical concerns—including rising international trade tensions, the growing likelihood of a messy Brexit and potential military conflicts in several regions of the world—could also dampen near-term economic growth.
• Capital Market Conditions: The major US stock indices posted solid gains in 2017, with the Dow Jones Industrial Average up 25%, the Nasdaq Composite Index up 28% and the S&P 500 up 19%. Moreover, each index ended every quarter sequentially higher. However, the current market cycle, at almost nine years old, is the second-longest bull market on record, and the sharp market corrections that occurred several times in the first quarter of 2018 serve as a reminder that a market downswing is inevitable. Strong capital market conditions, if sustained, will likely contribute to increased IPO activity.
• Venture Capital Pipeline: The pool of IPO candidates remains large and vibrant, including approximately 170 “unicorns” (private companies with valuations exceeding $1 billion). Although many VC-backed companies continue to be able to raise private “IPO-sized” rounds and delay their public debuts, investor demand for cash returns, coupled with the attractive valuations and solid aftermarket performance of VC-backed IPOs in 2017, should prompt additional VC-backed IPOs in 2018. The extent to which VC-backed companies—and other EGCs that remain on the sidelines—decide to pursue IPOs, and the timing of these decisions, will continue to have a substantial effect on the overall IPO market.
• Private Equity Impact: Fundraising in 2017 finally surpassed the longstanding record of 2008. Private equity firms sitting on record levels of “dry powder” (unspent capital that investors have committed to provide) are eager to put their reserves to work, but the elevated inflow of capital is intensifying competition for quality deals and driving up prices in some segments. At the same time, PE firms will face pressure to exit investments—via IPOs or sales of portfolio companies—and return capital to investors.

The IPO market has begun 2018 on a promising note, with 41 IPOs in the first quarter of the year—the second-highest number of IPOs in the first quarter of any year since 2000, trailing only the 60 IPOs in the first quarter of 2014.