An eventful 2019 for initial public offerings has led to some questions about the appeal of the traditional IPO – one of the oldest and most established forms of fundraising – to modern businesses.
Uber and Lyft’s faltering stock prices after their high-profile listings and the eventful collapse of WeWork’s planned initial public offering (IPO) in September 2019, following scrutiny of its finances, provide a potent demonstration of the worst-case scenario for private companies going public. Globally, the number of IPOs in 2019 was also the lowest within the past five years, and a four-year low by volume (even with Saudi Aramco’s giant listing ending the year).
In a world where private equity capital is plentiful and debt markets cheap, it is easy to understand why companies may opt to eschew the scrutiny of public markets. But going public has never just been about fundraising. The branding appeal of achieving an IPO is likely to endure even with plenty of other capital-raising options.
In assessing 2019 as a muted year it is important to note that the US, unlike other areas, had a strong year, with a 15% year-on-year increase on volume raised via its exchanges. Brexit and civil unrest in Hong Kong, among other geopolitical challenges, appear to have impacted other key IPO locations. In a roundabout way this could provide hope for IPO enthusiasts that the market is in ruder health than it might initially appear; in more stable circumstances there would probably have been more IPOs.
Even the touted rise of direct listings seems unlikely to unsettle IPO markets too much. Direct listings, which allow companies to enter public markets by listing existing stock, can be easier and cheaper than IPOs. But unless a company is already well capitalised, with a broad shareholder base, it is unlikely to be an appropriate alternative. While there are still companies that want to access the public markets, the vast majority will probably still opt for the tried and tested IPO.
