Where have the digital IPO's gone?
Authors: Marc Van den Broucque and Carlos Ochoa
Where have the digital IPOs gone?
There has been a lot of hype around digital IPOs lately, but is it all substantiated? The top two Google results for ‘2015 IPO Market’ both claim digital companies are key market drivers1. However, we have not seen a substantial volume of digital IPOs in 2015, with media attention shifting to ‘Private IPOs’. Have these digital IPOs disappeared forever, or has the media gotten ahead of itself?
IPO market dynamics
2014 was a bumper year for digital IPOs. Led by Alibaba’s US$22 billion IPO, the digital sector was firmly on IPO investors’ radars. Excluding Alibaba, 233 digital companies IPO’d last year raising over US$28bn – the most since 2010 by number and value.
Digital companies have represented a fair share of IPO volumes. Since 2010, they averaged 12% of total IPOs. This is in line with the overall markets, where IT represents 13% of the MSCI World index2. It is interesting to note, however, that of all the digital IPOs undertaken, the proportion of companies valued above US$1 billion on listing has increased from 9.7% in 2010-2012 to 15% in 2013-2014.
Q1 2015 witnessed a weak IPO market, declining by 26% YTD versus prior year as reduced consumer confidence fed into poor market conditions. Digital IPO volumes have declined in line with the overall market, continuing to represent 11% of total issuance.
Where does the pipeline stand?
At the time of writing, 39 digital companies had filed to IPO in 2015 but have not yet completed their fundraising. These companies were intending to offer in excess of US$800 million of shares3.
The announced pipeline is generating little attention in the digital community, who are speculating on when high profile names, especially unicorns, will look to list (not a single unicorn has filed nor completed an IPO). We estimate that unicorns are valued in excess of US$600bn in aggregate – more than the entire IPO market since 2012.
Public markets look attractive to digital issuers – enterprise values and revenue multiples are over 40% higher than levels observed between 2010 and 20134. Confidence in the markets is showing early signs of stabilising, which may provide a window for digital companies to tap the market. That said, ‘private IPOs’ are emerging as a competing source of capital.
The Private IPO phenomenon
The term ‘Private IPO’ was coined by the digital community to describe strong IPO candidates accessing capital from private investors, and increasingly from investors with public market backgrounds.
While the number of VC deals has not been increasing (in 2014 the number of deals declined by 7% versus the 2013-14 average5), valuation levels have risen significantly. There were 2.5x as many US$100m+ fundraisings in 2014 versus 20136.
Over the longer term rising valuation levels have been driven by companies using funds more efficiently to delay fundraisings, hence capturing more interim growth. In the short term, however, the trend seems largely attributable to increased competition for each deal.
VC money available for investment has remained relatively stable over recent years7. The key change in the market has been the entrance of new players looking to capture pre-IPO growth including corporate VCs (e.g. Mobily Ventures), hedge funds (e.g. Tiger Global), growth capital investors (e.g. KKR) and mutual funds (e.g. Blackrock).
Aside from valuations, late stage private capital is attractive to entrepreneurs for many reasons, including:
- Strategic advantage: Entrepreneurs can raise funds from investors who can add value via partnership opportunities or strategic advice.
- Less distraction: Private IPOs require less time and formality to undertake. Given that existing investors are likely to participate, less new money needs to be found.
- Maintain flexibility: Private shareholders are on the whole more informed and flexible in addressing challenges and opportunities than short-term focused public shareholders.
- Avoid scrutiny: A public listing creates a very visible profile. Share prices immediately reflect good and bad news. Staying private allows businesses to operate further from the spotlight.
- Reduce ongoing burden: Regulatory and reporting obligations represent significant commitments requiring additional personnel and compliance risks.
Some potential advantages of a listing have diminished over time. Many digital businesses maintain strong public profiles without a listing. Additionally, they are able to incentivise employees with shares despite not listing. However, a listing is still important if companies intend to pursue acquisitions using their own shares (e.g. Facebook-WhatsApp).
What next for digital IPOs?
Digital IPOs have not ‘gone’ anywhere – they continue to represent an appropriate amount of capital relative to the sector in public markets, in spite of recent market weakness.
The rise of private IPOs and the media attention they receive is, in our view, a phenomenon which is only likely to last in the short-medium term.
IPOs will continue to be a meaningful source of liquidity. This is driven by the continued need for VCs to achieve full exits of their investments (which private IPOs rarely provide), as well as the benefits which a public listing brings to funding diversity and flexibility for corporates.
In the short term, we predict the digital IPO pipeline will mainly consist of lower-profile companies as the ‘new’ pre-IPO investors chase headline grabbing private deals. In the medium term, private IPOs will continue as institutions deploy capital they have already raised. Over time, these investors will need to increase their focus on returns, hence valuations are likely to stabilise or decrease to sustainable levels. As this deal-frenzy subsides, public markets will regain their full importance for digital companies.
In conclusion, digital IPOs are not ‘gone’, certainly not forgotten, but are likely to take a back seat in the media to some of the other fundraisings being undertaken in the short to medium term.
Marc Van den Broucque is a Director in Delta Partners’ Corporate Finance business in Dubai. Marc has over 10 years of corporate finance experience, both as advisor and principal, working across Europe, the Middle East and Africa, where he has executed in excess of US$50 billion in M&A and capital markets transactions. Marc holds a first class honours degree in Accounting and Finance from the London School of Economics.
Carlos Ochoa is an Analyst with the Delta Partners’ Management Consulting division in Dubai. Prior to joining Delta Partners, Carlos was an Analyst within the Transaction Services practice at Deloitte in Barcelona. Carlos holds a degree in Business Administration from ESADE.
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