As IPO activity heats up in the technology sector, Baird sat down with Macie House, a Managing Director on Baird Global Investment Banking’s Equity Capital Markets team. Macie leads the firm’s equity origination efforts in the Technology & Services sector, and provided perspective on some of the current trends in the technology IPO market.
Q. What is the state of the technology IPO market?
- IPO activity is off to a strong start in 2018, with volume up 30% compared to 2017. Technology issuers continue to dominate, both in terms of the number of deals (#2) and capital raised (#1) YTD. Pricing outcomes have been encouraging as well, with 55% of technology IPOs pricing above the filing range so far this year, and strong performance in the aftermarket.
Going forward, the IPO market will be dependent on a number of factors – first and foremost, strength in the broader equity markets and low volatility. While no one can predict the short-term course of the stock market, we continue to advise companies that are contemplating a public offering to start the process so they are in a position to take advantage when the market window is open.
At present, we’re seeing the backlog continue to build for the latter half of the year and into early 2019. Fundamentals remain intact: nearly 90% of technology companies beat sales estimates in Q4 2017 and many subsequently raised forward looking estimates. Q1 2018 earnings results thus far have also been supportive.
Q. There’s been a lot of discussion about the availability of private capital and the fact that you no longer have to go public to raise funds. Could you share your thoughts on this trend? Is it something that will persist?
- There’s no question that the availability of private capital has had an impact on the IPO cycle, and you can see that in a number of ways. For example, the average amount of time that tech companies remain private has lengthened from four years in 1999 to 11 years in 2014. The average amount of capital raised by U.S. companies prior to IPO has increased from around $50 million in 2006 to around $200 million in 2017, according to Pitchbook.
There’s also a new trend of “mega-rounds,” or private rounds that are over $100 million that allow private companies to further postpone the IPO process, should they elect to do so. In 2013, there were 18 “mega-rounds”; by 2017, that number had jumped to 68. Meanwhile, median market cap post-IPO has increased from $440 million in 2010 to $3 billion in 2018 YTD.
While we don’t expect private capital to go away, we believe the public markets will continue to play a vital role in providing capital for technology companies. We can see from the number of companies that have either gone public or filed to go public in the last 12 months that this is still a very compelling option.
While the IPO process can sometimes be demanding, public capital markets are wide and deep and, at the high end, can support valuations many times what you typically find in the private markets. They provide an exit strategy for private market investors, a growth path for management, and, not to be ignored, an opportunity for a broad range of institutional and individual investors to participate in the technology growth story.
Q. What impact will the Spotify IPO have on the way IPOs get done in the future?
- Spotify listed this year and has done reasonably well in the aftermarket. It seems safe to assume that some other companies will consider taking the same route and choose to direct list, but clearly that won’t be for everybody. Completing this process successfully requires the company to have some unique characteristics. Spotify is a global consumer-facing brand and has massive scale.
Most disruptive technology companies will still benefit from the support investment banks provide in helping management teams tell their story to investors and in turn building a shareholder base that is focused on long-term opportunities.
Q. What impact, if any, has the Jobs Act had on the IPO market?
- We have continued to keep an eye on the Jobs Act, and its impact on the IPO market. Contrary to what some may have expected, it hasn’t really led to a flood of new filings, but it has been helpful to companies in some circumstances. The Jobs Act allows management to talk with investors before the IPO roadshow in order to get a sense of the market, and to gather early feedback on products and strategies without disclosing the full business plan to competitors. Lastly, confidential filing option provides companies additional flexibility to move quickly to go public when market conditions are favorable.
Q. Do you expect more so-called “unicorns” to go public this year? What impact will that have on other technology companies thinking about an IPO?
- I do expect that we will see more “unicorns” approach the public markets, and these tend to be high profile companies in significant industries, with substantial followings in the investment community, so they’re closely watched. How they do will certainly have an impact on other unicorns as well as smaller technology companies that are considering listing their shares. Success tends to breed success and if these transactions do well from a valuation and after-market perspective, that is likely to attract more activity.
While not directly related, it’s also interesting to note that we’re seeing companies in China in similar sectors to the U.S.-based unicorns, such as ride hailing, online financial services and others, file to list shares both in the US and APAC with valuations in billions. It’s worth watching.