The 2015 IPO market produced 152 IPOs, a disappointing tally that lagged well behind the 244 IPOs in 2014 despite continued strength in the life sciences sector. Setting aside the anomalous years of 2008 and 2009, however, the 2015 total was largely in line with the annual average of 157 IPOs that prevailed over the ten-year period preceding 2014.
The year started slowly, with the first quarter producing 28 IPOs. The pace of new offerings increased to 63 in the second quarter—June’s 33 IPOs represented the highest monthly total since 2000. The IPO market struggled for the balance of the year, with deal flow hampered by heightened volatility and broad market declines. The major indices all hit yearly lows in late August, as the capital markets reeled from news of surprisingly slow economic growth in China. The third quarter produced 31 IPOs and the fourth quarter added 30 more. The year ended on a whimper, with only a pair of new offerings in December—the second-slowest December in the last 15 years, eclipsed only by the donut in 2008 at the height of the financial crisis.
Gross proceeds for 2015 were $25.17 billion, the third-lowest annual total over the past decade, and almost two-thirds below the $74.39 billion raised by IPO companies in 2014. The 2015 total was almost one-quarter less than the average annual gross proceeds of $32.92 billion over the ten-year period preceding 2014.
The median offering size declined for the second consecutive year, reaching $91.7 million in 2015, down from $96.0 million in 2014 and $107.4 million in 2013. The 2015 figure represents the second-lowest annual median offering size since 2000.
The decline in gross proceeds and median offering size for 2015 are both explained, at least in part, by the high proportion of IPOs by life sciences companies, which typically have smaller offerings, and the overall dominance of IPOs by emerging growth companies (EGCs), of which most life sciences companies are a subset. Worsening market conditions in the second half of 2015 contributed to the reduction in the median offering size from the prior year.
The paucity of large IPOs in 2015 also contributed to the gross proceeds shortfall compared to prior years. There was only a single billion-dollar IPO in 2015, and another seven IPOs that raised $500 million or more, a stark decline from the prior two years. In 2014, there were nine billion-dollar IPOs, with an additional 15 that raised at least $500 million, while 2013 generated six billion-dollar IPOs, and another 12 raised $500 million or more.
Life sciences companies accounted for 47% of all US IPOs in 2015, up from 40% in 2014 and 28% in 2013. EGCs accounted for all but ten of the year’s IPOs, or 93% of the total, compared to 85% of all IPOs in 2014 and 82% in 2013. The median offering size for life sciences IPOs increased from $59.0 million in 2014 to $71.8 million in 2015. Among non-life sciences IPO companies, the median offering size in 2015 was $128.5 million, up slightly from the $126.2 million figure in 2014, nearly matching the $128.1 million median that prevailed over the five-year period preceding 2015. The median offering size for IPOs by EGCs in 2015 was $81.0 million (down from $86.7 million in 2014), compared to $450.5 million for IPOs by non-EGCs (up from $446.7 million in 2014).
The average 2015 IPO produced a first-day gain of 16%, improving on the 14% first-day gain for all IPOs in 2014 and marking the second-highest annual figure since 2000 (trailing only the 21% average gain for 2013).
There were five “moonshots” (IPOs that double in price on their opening day) in 2015—down from seven in 2014. All five saw that gain erode in the aftermarket, ending the year trading an average of 23% below their first-day close.
In 2015, 26% of all IPOs were “broken” (IPOs whose stock closes below the offering price on their first day), just under the 27% tally for 2014 but slightly higher than the 25% figure that prevailed over the five-year period preceding 2014. Only six of 2015’s 39 broken IPOs recovered their first-day loss by the end of the year.
By year-end, the average 2015 IPO company had seen its first-day gain entirely erased, ending the year 0.4% below its offering price. While 28% of all 2015 IPO companies were trading at least 20% above their offering price at year-end, 55% were trading below their offering price and 68% were trading below their first-day closing price.
All but one of the top ten performers at year-end, based on percentage gain from offering price, was a life sciences company. The year’s best performer was Aclaris Therapeutics, which was trading 145% above its offering price at year-end, followed by Collegium Pharmaceutical (up 129%) and Spark Therapeutics (up 97%). The best-performing non-life sciences company was Shake Shack, up 89%.
The prevalence of life sciences IPO companies affected median annual revenue and profitability statistics in 2015. The median annual revenue of all IPO companies in 2015 was $37.8 million—45% less than the $68.2 million figure for 2014 and 65% below the $108.8 million figure for the five-year period preceding 2014. Life sciences IPO companies in 2015 had median annual revenue of $0.1 million, compared to $120.1 million for all other IPO companies.
The percentage of profitable IPO companies declined to 30% in 2015, from 36% in 2014 and 46% in 2013. Only 6% of life sciences IPO companies in 2015 were profitable, compared to 53% of all other IPO companies. The latter figure is comparable to the 57% figure that prevailed over the five-year period preceding 2015 for non-life sciences IPO companies.
Individual components of the IPO market fared as follows in 2015:
- VC-Backed IPOs: The number of IPOs by venture capital–backed US issuers declined 38%, from 102 in 2014 to 63 in 2015, accounting for 54% of all US-issuer IPOs in 2015. The median offering size for US venture-backed IPOs increased 4%, from $75.0 million in 2014 to $77.9 million in 2015. The median deal size for non–VC-backed companies in 2015 was $113.3 million. The average 2015 US-issuer VC-backed IPO gained 3% from its offering price through year-end.
- PE-Backed IPOs: Private equity–backed IPOs by US issuers declined 41%, from 46 in 2014 to 27 in 2015. Overall, PE-backed issuers accounted for 23% of all US-issuer IPOs in 2015, down from 25% in 2014. The median deal size for PE-backed IPOs in 2015 was $222.5 million—almost triple the $78.6 million figure for all other IPOs. The average PE-backed IPO in 2015 gained 4% from its offering price through year-end.
- Life Sciences IPOs: Although the number of life sciences company IPOs declined from 98 in 2014 to 72 in 2015, the sector captured 47% of the US IPO market in 2015. The average life sciences IPO company in 2015 ended the year down 1% from its offering price, and 61% of the year’s crop were trading below their offering price at year-end.
- Tech IPOs: Deal flow in the technology sector declined by almost half, from 69 IPOs in 2014 to 35 IPOs in 2015—the lowest annual number since 2009. The tech sector’s share of the US IPO market has now fallen for five consecutive years, from 46% in 2011 to 23% in 2015. The average tech IPO ended the year with a gain of 2% from its offering price, compared to an average loss of 1% for non-tech IPOs.
- Foreign Issuer IPOs: The number of US IPOs by foreign issuers declined by 42% from 60 in 2014 (25% of the market) to 35 in 2015 (23% of the market). Among foreign issuers in 2015, Chinese companies led with five IPOs, followed by issuers from Canada, Israel and the United Kingdom (each with four IPOs). The average foreign issuer IPO company ended the year trading 3% below its offering price.
In 2015, 62 companies based in the eastern United States (east of the Mississippi River) completed IPOs. Western US-based issuers accounted for 55 IPOs, and foreign issuers accounted for the remaining 35 IPOs. California led the state rankings with 35 IPOs, followed by Massachusetts (with 14 IPOs), New York and Texas (each with nine IPOs).
IPO market activity in the coming year will depend on a number of factors, including the following:
- Economic Growth: While the US economy has continued to improve in a number of key metrics, global economic growth remains anemic at best, with economic stagnation affecting many countries. Slowing growth in China—until now a stalwart of economic growth—is having a ripple effect on the US capital markets. Rather than stimulating economic growth, the sharp decline in oil prices is further weighing on the IPO market. Moreover, after seven years with interest rates at historic lows, the Federal Reserve raised its benchmark interest rate in late 2015, raising the specter of further hikes in 2016. A clearer view of sustained economic growth will be key if the IPO market is to maintain or increase the pace that prevailed in 2015.
- Capital Market Conditions: After several years of impressive gains, the major US indices posted mixed results in 2015, with the S&P 500 and Dow Jones Industrial Average down 1% and 2%, respectively, and the Nasdaq Composite Index up 6%. All three declined sharply in the first two months of 2016. In addition, volatility increased in the second half of 2015 and remained high into early 2016. A return to more robust and less volatile capital market conditions would contribute to increased IPO activity.
- Venture Capital Pipeline: Before declining by nearly 40% in 2015, VC-backed IPOs had resurged over the preceding five years. In spite of 2015’s disappointing performance, the pool of attractive VC-backed IPO candidates remains large, including approximately 150 “unicorns” (private tech companies valued at $1 billion or more). Many VC-backed companies may have delayed their IPOs because it has been easy to raise capital privately in recent years, but—as more questions are raised about excessive private valuations—other VC-backed companies may be deterred by the harsh reality of the public markets.
- Private Equity Impact: Private equity firms are still sitting on near-record levels of “dry powder” (unspent capital that investors have committed to provide) and the supply of capital is causing competition for quality deals to intensify, driving up prices. The recent hike in interest rates may cause headwinds for highly leveraged private equity–backed companies that are eyeing IPOs in 2016. With uncertain economic times, however, investors may have a greater affinity for IPOs by PE-backed companies with proven profitability and cash flows.
- Impact of JOBS Act: The extent to which the JOBS Act has prompted IPOs by companies that otherwise would not have gone public is unknown. What is clear, however, is that the confidential submission provisions of the act and the significant increase in the maximum number of stockholders that a private company may have without registering as a public company have given EGCs more flexibility in timing their IPOs. The FAST Act’s recent changes to the JOBS Act—most notably those that permit EGCs, in certain circumstances, to omit financial information for historical periods otherwise required in a registration statement and reduce the minimum period of time between public filing and the road show from 21 to 15 days—should further smooth the IPO journey for EGCs.
Although the IPO market entered 2016 at the slowest pace since 2009, without a single IPO in January and only four in February, a number of qualified companies are poised to come to market when conditions are more conducive. As long as favorable economic tailwinds continue to prevail, the currently stalled deal flow can be expected to resume as capital market conditions improve.