The road to the public markets has frozen over for the time being.
As U.S. equities plunge amid rising concerns over the spread of the novel coronavirus and an oil price war, companies are poised to put their immediate plans to go public on the shelf — a move that is muddying the picture for initial public offerings for the rest of 2020.
"When we go through this kind of a drop, where we're seeing these big swings in the marketplace, it basically freezes up the IPO market," said Kathleen Smith, a principal at institutional research and IPO exchange-traded fund provider Renaissance Capital, in an interview. "Companies are anxious to tap the market. They're lining up, they want to go, they just know they can't."
Up until the recent sell-off, the IPO market held a steady pace in 2020 after a record-setting 2019. There were 30 U.S. IPOs in 2020 through the end of February, according to S&P Global Market Intelligence data. By comparison, 24 companies conducted IPOs in the U.S. in January and February of 2019 following a tumultuous fourth quarter of 2018 for U.S. stocks.
The interest among private companies in conducting an IPO in the near future has crumbled though. Global markets have plunged with volatility surging back after a docile 2019, raising questions about valuations and investor demand for a newly issued stock.
Among the companies that have put their IPO plans on ice for the time being are Warner Music Group Corp. and Cole Haan LLC, according to Reuters. Airbnb Inc., one of the highest-profile unicorns expected to hit the public markets in 2020, is in jeopardy of having to push back its IPO as well, Bloomberg News reported.
"There's not going to be much activity in March at all," said David Ethridge, a managing director at PwC who leads the company's U.S. IPO services business, in an interview.
Yet, the pipeline of companies looking to go public has not slowed. Food-delivery service DoorDash Inc. and grocery giant Albertsons Companies Inc. are among several companies that have recently filed to conduct IPOs. But the window to launch their offering in 2020, after the coronavirus-linked volatility subsides but before markets grow choppy ahead of the U.S. presidential election, is narrowing swiftly.
Fears around an election-inspired market drop in late 2020 may be overblown, according to Ethridge, who said IPO volumes have historically been unaffected in prior election years other than in a few select sectors. In a March 4 blog post, Ethridge wrote that the Russell 2000 has finished in positive territory in five of the past eight presidential election years.
For the IPO market to open back up, stocks need to not only rebound but also stay positive for some time. IPOs tend to dry up during periods of higher volatility, according to Renaissance Capital’s Smith.
The Cboe Volatility Index can be used as a good measure for conditions in the IPO market, Smith said. The index, known as the VIX, measures implied volatility using S&P 500 index options. If the benchmark is below 30 for about a month, IPOs will likely resume, she said.
At PwC, Ethridge relies on daily stability in the Russell 2000 as his barometer. When that index calms down, the IPO market will likely open back up gradually rather than all at once, he said.
"It may not be a blanket green-light for companies," said Ethridge, who previously was co-head of listings at the New York Stock Exchange, in an interview. "Bankers are going to look and pick the fair-haired child among all their children. The one that is the strongest ... that's the one they're going to bring to market right now."