Sky high valuations have deflated the IPO market

Steven Loeb · March 31, 2015 · Short URL:

Q1 2015 was the worst quarter for IPOs since 2013, and saw the lowest amount raised since 2011

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Last week I wrote a story about the tech bubble that is currently in the private market. Essentially, more money is pouring into venture capital, and valuations are ballooning, creating a plethora of so-called "unicorns," or companies with a valuation of at least $1 billion.

There is a ton of evidence to support this, both anecdotally and empirically. The question is now: what kind of effect is this unicorn fever going to have on the markets? So far, the big impact has been on the IPO market.

With 34 IPOs raising $5.4 billion, the first quarter of 2015 turned out to be the least active quarter by IPO count since the first quarter of 2013, and the smallest by proceeds raised since the third quarter of 2011, according to a report out on Tuesday from Renaissance Renaissance Capital. 

To compare: the first quarter of 2014 saw 64 deals, and $10.6 billion raised. 

Nearly half of this year's public offerings, 16 in all, were from the healthcare sector, and biotech companies in particular, though healthcare IPOs were still down from 30 in the same quarter in 2014. The two sectors that were hit the hardest: energy in the first quarter of 2015 were technology and energy. They have seen four IPOs and two IPOs each, down from 14 and six at the same time the year before, respectively.

As a result of there being fewer deals, the average deal size has shrunk as well. The ten largest IPOs this quarter raised $3.9 billion, or 35% less than the top ten from same period a year ago. Two of the tech IPOs this year were Box and Maxpoint Interactive, which together raised only $250 million in their offerings. 

So what is causing all of this downturn? It's the sky high valuations that venture capitalists are willing to give their investments.

"Technology IPO issuance was likely dampened by the widespread availability of private funding at very high valuations, which produced little urgency for companies to seek IPO capital," Renaissance Capital wrote."Volatile currency markets, global interest rate movements and heightened follow-on activity also competed for the attention of institutional investors."

All is not lost, however, as the firm also believes that due to a "solid performance of recent IPOs combined with a large active pipeline," the second quarter will be more active. The pipeline currently includes Etsy, Apigee and GoDaddy, which have all already filed.

"Only 47 companies submitted initial filings in the 1Q 2015, down from 98 in the 1Q 2014. The total IPO pipeline now contains 122 IPOs looking to raise $22 billion, about the same number of deals as one year ago but 33% lower in terms of proceeds," the firm wrote.

"Of these, 51 have filed initial or updated S-1s in the past 60 days, indicating plans to move forward with an IPO in the upcoming quarter."

Again, a large chunk, in this case 35%, of those IPOs are in the health care space. Energy IPOs, mostly GPs and MLPs, account for 20%.

VentureBeat first noticed this report.

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