Why IPOs Faded in 2016
The number of U.S. companies raising capital through initial public offerings (IPOs) dropped significantly in 2016. For the first nine months of the year, only 79 companies executed IPOs, raising a combined $13.4 billion. This represented a 44% drop in the number of deals and a 49% decline in capital raised compared with the same period in 2015.1 And 2015 was a slow year compared with the strong IPO market in 2013 and 2014 (see chart).
Why the slowdown? In a word: uncertainty. The closely contested presidential election and speculation on when the Federal Reserve would raise interest rates may have led some companies to wait for a clearer picture of future policies. Global headwinds, including the Brexit vote and continuing conflict in the Middle East, might also have eroded confidence.2
Along with these macroeconomic concerns, there is a trend toward companies strengthening their cash positions and developing more mature businesses before testing the public market.3
Invest with Caution
With the election behind us, some experts are predicting a strong year for IPOs in 2017.4 Whether this turns out to be true may depend on the stock market. Because the purpose of an IPO is to raise as much money as possible by issuing a given number of shares, companies are more likely to offer shares on a stock exchange when stock prices are high and investors are in the mood to take a risk on a new venture.
Some IPOs garner substantial media attention, and it’s natural for investors to wonder whether they should take action and try to buy shares in what seems to be an exciting prospect. In reality, not everyone who wants to participate in an IPO may be able to do so, because only a limited number of shares are available.
Once the stock is traded on the market, however, it is generally available for purchase (as long as an investor who holds the stock wants to sell). If you’re interested in a newly public company, do your homework before investing. Shares can be volatile after an IPO, and the fact that investors bought an initial public offering doesn’t guarantee a successful future for the business.
The return and principal value of all stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.
1–4) Ernst & Young, 2016