2018 Year-End IPO Market Review

2018 Year-End IPO Market Review

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Review

The IPO market produced 183 IPOs in 2018, an increase of 29% from the 142 IPOs in 2017. The year’s tally represented the second-highest annual figure since 2007, trailing only the 244 IPOs in 2014.

Total gross proceeds for the year were $43.75 billion—43% above the $30.51 billion figure for 2017.

IPOs by emerging growth companies (EGCs) accounted for 92% of the year’s IPOs, compared to 87% in 2017—a figure that matched the overall market share for EGCs since enactment of the JOBS Act in 2012.

The median offering size for all 2018 IPOs was $108.0 million, a 10% decline from the $120.0 million median for 2017 but 10% higher than the $98.0 million median for the five year period from 2012 to 2016.

The median offering size for life sciences IPOs in 2018 was $85.3 million, 8% above the $79.1 million median in 2017 and 31% higher than the $65.0 million median for the five year period from 2012 to 2016. By contrast, the median offering size for non–life sciences IPOs in 2018 was $161.0 million—up 7% from the $151.0 million median in 2017 and 23% above the $130.8 million median for the five-year period preceding 2017.

In 2018, the median offering size for IPOs by EGCs was $101.3 million, a decrease of 5% from the $106.5 million median in 2017 but 18% above the $85.9 million median that prevailed from enactment of the JOBS Act through 2016. The median non-EGC offering size in 2018 was $731.5 million, a 55% increase from the $472.0 million median for 2017, representing the highest annual level since 2012.

The median annual revenue of all IPO companies in 2018 was $68.2 million, almost one-third below the $101.4 million figure for 2017 but 20% above the $57.0 million figure that prevailed from 2014 to 2016.

In 2018, only 43% of life sciences IPO companies had revenue, up from 34% in 2017 but below the 64% of life sciences IPO companies that had revenue during the five-year period from 2012 to 2016. The median non–life sciences IPO company in 2018 had annual revenue of $201.6 million, 5% below the $212.8 million median for 2017 and 2% below the $205.8 million median for 2016, but 31% above the $154.0 million median that prevailed during the five-year period from 2011 to 2015.

EGC IPO companies in 2018 had median annual revenue of $50.8 million, compared to $1.69 billion for non-EGC IPO companies. The median annual revenue for non–life sciences EGC IPO companies in 2018 was $167.3 million, an increase of 10% from the $152.1 million median for 2017 and 55% above the $108.2 median that prevailed from the enactment of the JOBS Act through 2016.

The percentage of profitable IPO companies declined to 28% in 2018 from 34% in 2017 and 36% in 2016. Only three life sciences IPO companies in 2018, or 4% of the year’s total, were profitable, compared to 10% over the five year period from 2013 to 2017. In 2018, 44% of non–life sciences IPO companies were profitable, down from 52% for the preceding five-year period.

In 2018, the average IPO produced a first-day gain of 16%, compared to 14% for the average IPO in 2017 and 12% in 2016. The average 2018 first-day gain was the second-highest annual figure since 2000, behind only the 21% first-day gain in 2013.

The average life sciences IPO company gained 14% in first-day trading in 2018, compared to 18% for the year’s non–life sciences IPO companies. First day trading results in 2018 were similar to 2017, when the average life sciences IPO company gained 13% in first-day trading, compared to 14% for non–life sciences IPO companies. In 2016, by contrast, the average life sciences company rose only 6% on its first trading day—less than half the 16% gain achieved by non–life sciences IPO companies.

There were a pair of “moonshots” (IPOs that double in price on their opening day) in 2018, up from one each in 2016 and 2017 but down from an annual average of six moonshots between 2013 and 2015—a three-year period that stands out as an aberration when compared to the incidence of moonshots for all other years following the dot-com boom.

In 2018, 24% of IPOs were “broken” (IPOs whose stock closes below the offering price on their first trading day), up from 20% in 2017 but equal to the percentage over the five-year period from 2012 to 2016. In 2018, 28% of life sciences company IPOs were broken, compared to 21% of non–life sciences company IPOs.

Overall, the average 2018 IPO company ended the year 2% below its offering price—only the third time in the last ten years that the average IPO has failed to produce a gain by year-end.

The year’s best-performing IPO was Tilray (trading 315% above its offering price at year-end), followed by Allakos (up 190%), Inspire Medical Systems (up 164%) and Goosehead Insurance (up 163%).

At the end of 2018, 61% of the year’s IPO companies were trading below their offering price—life sciences companies faring better than their non–life sciences counterparts, with 55% trading below their offering price compared to 64% for non–life sciences IPO companies.

Individual components of the IPO market fared as follows in 2018:

  • VC-Backed IPOs: The number of IPOs by venture capital–backed US issuers increased by 52%, from 50 in 2017 to 76 in 2018. The percentage of all US-issuer IPOs accounted for by VC-backed companies increased from 48% in 2017 to 61% in 2018. The median offering size for US VC backed IPOs increased by 5%, from $96.8 million in 2017 to $101.3 million in 2018. The median deal size for non–VC-backed companies was $142.8 million in 2018, down 8% from $156.0 million in 2017. The average 2018 US-issuer VC-backed IPO gained 8% from its offering price through year-end.
  • PE-Backed IPOs: Private equity–backed IPOs by US issuers declined by 23%, from 26 in 2017 to 20 in 2018. Overall, PE-backed issuers accounted for 16% of all US-issuer IPOs in 2018, compared to 25% in 2017. The median deal size for PE-backed IPOs in 2018 was $288.0 million, compared to $100.2 million for all other IPOs. The average PE-backed IPO in 2018 ended the year 9% below its offering price.
  • Life Sciences IPOs: There were 74 life sciences company IPOs in 2018, an increase of 68% from the 44 in 2017. The portion of the IPO market accounted for by life sciences companies increased from 31% in 2017 to 40% in 2018. While the 2018 figure lags behind the sector’s 43% market share in the three-year period from 2014 to 2016, it is more than double the 17% that prevailed over the five-year period preceding 2014. The average life sciences IPO company in 2018 ended the year down 1% from its offering price, compared to a 3% year end decline for non–life sciences IPO companies.
  • Tech IPOs: Deal flow in the technology sector increased by 30%, from 44 IPOs in 2017 to 57 IPOs in 2018. The tech sector’s share of the US IPO market remained steady between 2017 and 2018, at 31%, up from recent lows of 27% in 2016 and 23% in 2015, but well below the 45% that prevailed over the three-year period from 2010 to 2012. The average tech IPO ended the year 1% above its offering price, compared to a 3% loss for non-tech IPOs.
  • Foreign-Issuer IPOs: The number of US IPOs by foreign issuers increased by 53%, from 38 in 2017 (27% of the market) to 58 in 2018 (32% of the market). Among foreign issuers, Chinese companies led the year with 32 IPOs (the highest annual number of IPOs from China since 2010), followed by companies from the United Kingdom (eight IPOs) and Brazil and Israel (each with three IPOs). The average foreign-issuer IPO company ended the year down 5% from its offering price.

In 2018, 58 companies based in the eastern United States (east of the Mississippi River) completed IPOs, compared to 67 for western US–based issuers. California led the state rankings with 43 IPOs, followed by Massachusetts (20 IPOs), Texas (10 IPOs), New York (six IPOs), and Pennsylvania and Washington (four IPOs each).

Outlook

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

  • Economic Growth: US economic growth slowed over the course of 2018, with the fourth quarter posting a 2.2% increase, down from 3.4% in the third quarter and 4.2% in the second quarter. Despite the slowdown, the GDP growth rate for the year was among the highest in over a decade, job growth has remained consistently strong and the unemployment rate is at its lowest level in nearly 50 years. The residual effects of the US corporate and individual income tax rates enacted in late 2017, coupled with the continuation of low interest rates, should continue to support economic growth in the coming year, although geopolitical concerns—including rising international trade tensions and the growing likelihood of a messy Brexit—could dampen economic growth in the United States and overseas.
  • Capital Market Conditions: The major US stock market indices all posted solid gains through the first three quarters of 2018, before heading sharply lower in the fourth quarter. In what ended up as the worst year for stocks since 2008, the Dow Jones Industrial Average fell 5.6%, the Nasdaq Composite Index declined 3.9% and the S&P 500 dropped 6.2%. This bleak year-end 2018 performance was more than erased in the first quarter of 2019, as the Dow, Nasdaq and S&P 500 posted gains of 11.2%, 16.5% and 13.1%, respectively, but a return of this kind of volatility in the capital markets could create headwinds for the IPO market.
  • Venture Capital Pipeline: The pool of IPO candidates remains large and vibrant, including more than 300 “unicorns” (private companies with valuations exceeding $1 billion). With 2018 yielding more than 175 venture financing rounds that raised at least $100 million—an increase of almost two-thirds from 2017—it is clear that many VC-backed companies continue to be able to raise private “IPO sized” rounds and delay their public debuts. However, investor demand for cash returns, coupled with the attractive valuations and comparatively favorable aftermarket performance of VC-backed IPOs in 2018, should prompt additional VC-backed companies to go public in 2019.
  • Private Equity Impact: Although private equity fundraising in 2018 declined by one-quarter from the record-setting level of 2017, PE firms are eager to put their unspent capital to work in new acquisitions. At the same time, PE firms face pressure to exit investments—via IPOs or sales of portfolio companies—and return capital to investors.

The US government shutdown at the start of 2019 contributed to a tepid start for the 2019 IPO market, with only 18 IPOs in the first quarter, but deal flow has since picked up, with 16 offerings in April. The long-awaited IPOs of Lyft, Pinterest, Uber and Zoom and the likely arrival of additional unicorn IPOs should help build further momentum as the year progresses.