Investment Bankers Cite Availability of Private Funding As Main Factor in Decrease in U.S. IPOs in 2015 According To BDO USA, LLP

June 2015

Jerry Walsh
(631) 419-9008

Chicago, IL – June 23, 2015 – According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, a majority (56%) of capital markets executives at leading investment banks believe the widespread availability of private funding at attractive valuations is the main factor in the dramatic drop in the number of initial public offerings (IPOs) on U.S. exchanges in 2015 when compared to 2014. A cooling stock market (22%), fewer offerings from private equity firms (14%) and the collapse of oil prices (8%) are cited as the main factor by much smaller proportions of the bankers.  When asked about the impact of companies putting off their IPOs due to the availability of late-stage financing in the private sector, a majority (61%) of the bankers feel it will lead to less offerings going forward, while more than a quarter (29%) predict it will result in better IPOs in the future. Two-thirds (66%) of the capital markets executives believe the recent trend of mutual fund companies investing in popular, private technology businesses is a further disincentive to companies considering an IPO. 
During the remainder of 2015, a majority (54%) of bankers predict IPO activity will remain at the same level as the first half of the year.  Just over a quarter (26%) anticipate the pace of U.S. IPO activity will increase in the second half of 2015, while one-fifth (20%) forecast a decrease in offering activity.  Overall, capital market executives are predicting virtually no net change (under 1%) in the number of U.S. IPOs during the second half of the year.  They anticipate offerings will average $174 million in size, which projects to approximately $36 billion in total IPO proceeds on U.S. exchanges in 2015.  This would represent the lowest level of proceeds since 2009, when the market was still reeling from the financial crisis.
“It was almost inevitable that the 2015 U.S. IPO market was going to experience a slowing of growth given the impressive increases achieved in 2013 and 2014, however the drop-off in offerings this year has been significant.  While there are always multiple contributing factors for such a dramatic change, the capital markets community clearly believes the wide availability of private financing at favorable valuations is playing the leading role,” said Brian Eccleston, a partner in the Capital Markets Practice at BDO USA.  “If this access to private funding continues, bankers believe it will lead to fewer IPOs moving forward.  Certainly, this is a trend that bears watching.”
Smaller Offerings
In addition to the drop in the number of IPOs, the size of the average offering has decreased significantly in 2015.  A large proportion of the capital markets community (41%) attribute the smaller average deal size to fewer large deals coming from private equity firms who have already exited many of their more mature businesses.   Other factors cited by the bankers for the smaller sized offerings are increased investor risk tolerance for smaller offering businesses (32%) and valuation pressures forcing offering businesses to cut prices (21%).  Only six percent attribute the decreased size to the JOBS Act encouraging smaller businesses to go public.  Moving forward, capital markets executives anticipate that the size of the average IPO in the second half of the year will be $174 million, about the same as the first half.
“In any individual year, IPO proceeds can be greatly inflated by one or two major offerings.  However, even if you removed the massive Alibaba offering from last year’s figures, the size of the average U.S. IPO has still decreased significantly in 2015,” said Chris Smith, a partner in the Capital Markets Practice at BDO USA.  “Private equity and venture capital firms were the source of many mature, larger offerings over the past two years and it will take time for them to replenish their portfolios.”
IPO Threats
In reflecting upon the greatest threat to a healthy U.S. IPO market during the remainder of 2015, almost four in ten (39%) of the I-bankers cite the Federal Reserve paring back monetary stimulus, while more than one-third (35%) identify global political and financial instability.  Other threats cited were financial instability in Europe (16%), the weakening Chinese economy (8%) and a continued drop in oil prices (2%).
Industry Forecast for U.S. IPOs
For the third consecutive year, the healthcare sector is leading all industries in the number of U.S. IPOs.   Moving forward, investment bankers predict more healthcare offerings (63%) during the second half of the year and an even greater proportion forecast an increase in IPOs from the technology (67%) and biotech (66%) sectors.  No other vertical has a majority of the bankers anticipating an increase in deals during the remainder of the year (see full chart below).

Industry Increase Flat Decrease
Technology 67% 27% 6%
Biotech 66% 25% 9%
Healthcare 63% 24% 13%
Real Estate 46% 34% 20%
Media/Telecom 40% 36% 24%
Industrial/Manufacturing 33% 44% 23%
Energy/Natural Resources 33% 21% 46%
Financial 30% 47% 23%
Consumer/Retail 23% 42% 35%

(Proportions of Capital Markets Executives expecting IPO activity to increase, remain stable or decrease in specific industries during remainder of 2015.) 

“The healthcare and biotech sectors have been driving U.S. IPO activity for three years now and there are no indications this will change in the near future.  Although better than two-thirds of the bankers project more technology offerings in the remainder of the year, this isn’t a bold prediction given the low number of tech IPOs during the initial six months of the year,” said Ted Vaughan, a partner in the Capital Markets Practice of BDO USA.  “No industry has been impacted more by the availability of private financing than technology.  As long as these sources of private funding remain available and at favorable valuations, IPOs from the tech sector will trail their historical numbers.”
The Source of IPOs?
When asked to identify the primary source of IPOs in the second half of the year, just under one-third (32%) of capital market executives cite private equity firms, while more than a quarter (27%) identify venture capital portfolios.  Spinoffs and divestitures (22%) and owner-managed, privately-held businesses (19%) are the other sources identified by the bankers.
Global IPO Market Share
Through the first six months of 2015, U.S. exchanges narrowly trail Hong Kong in proceeds raised from initial public offerings.  Only one-third (33%) of investment bankers anticipate U.S. exchanges increasing their current share of the global IPO market during the second half of the year.  A majority (53%) predict the U.S. will maintain its current share of global proceeds during the remainder of the year, while 13 percent believe the U.S. share will decline in the second half of 2015.
The BDO IPO Halftime Report is a national telephone survey conducted by Market Measurement, Inc., an independent market research consulting firm, on behalf of BDO USA.  Executive interviewers spoke directly to 100 capital markets executives, using a telephone survey conducted within a scientifically-developed, pure random sample of the nation's leading investment banks.
BDO USA is a valued business advisor to businesses making a public securities offering.  The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on a myriad of accounting, tax and other financial issues.
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