The IPO market has gone through some changes in 2019 that could actually benefit investors.
The last month has been a wild ride. As Americans, we’ve been bombarded by a lot of news in the media pertaining to politics and economics and what we might experience in the next few months or even for the next year to come.
There’s some big new headline every single day that makes us feel like the world is crashing down on us. However, some changes could be for the better.
The IPO market has gone through some changes in 2019 that could actually benefit investors. This usually happens as the year comes to an end, but with an impeachment inquiry on President Trump and still no real resolution on the trade war with China, everything seems a little up in the air at the moment. And that feeling is filling people and investors up with uncertainties.
I like to think there are a lot of changes happening and this is kind of the beginning of those changes. People are realizing that what worked before doesn’t necessarily work now, or even that the problems that weren’t big before have now snowballed and become problems that need solutions as soon as possible.
Did the IPO Market Take a Hit?
A big example of “what worked before doesn’t work now” can be seen in the IPO market. A few weeks ago, a well-known privately held company, WeWork, filed its S-1 in hopes of going public within the next month. However, that’s not at all what happened. Instead, the company withdrew its IPO and fired its founder and CEO, Adam Neumann.
The company’s business model consists of signing long-term leases for properties and then dividing them into smaller units, renovating those units, and renting them out on a flexible short-term basis. WeWork’s business model helped the company become the largest private tenant in New York City and London. According to CoStar data, it had 7.7 million square feet of office space in New York City and 4.1 million square feet in London.
This kind of aggressive business model meant the company took on $47 billion in lease liabilities. Before announcing its IPO and filing its S-1, WeWork was popular, and a lot of clout came along with the company, which made it easy to lease those spaces out.
It also made it easier for the company to negotiate with landlords and create deals so it wouldn’t have to spend so much cash upfront and go into more debt. WeWork received about $455 million in upfront payments in the first half of this year.
What a lot of analysts realized when WeWork released its S-1 and made its financials public is that there was a risk that the company wasn’t going to be able to pay its rent. If the company stayed on the path it’s been on in the first half of 2019, it would run out of money next year. That’s the last thing you want when investing in a company.
In January, the company had a private valuation of $47 billion, but really its public valuation was below $20 billion.
Is it Time to Embrace Change?
It’s been a tough year for companies like WeWork — popular companies that have a lot of clout but don’t have the valuation to back it up. And this has been the year investors and analysts are realizing that — and that buying into their IPOs won’t do anyone any good in the long term.
You could say investors are a lot more aware this year. No one wants to invest in a company just because it’s the next “hot” company, because there’s another one just around the corner.
Investors want a company to match up to its valuation. Usually, when people think about IPOs, they like to think about those first-day surges and gains. It’s exciting to watch a company have massive gains in just the first day of trading. However, it’s not entirely realistic, and it’s not what an investor wants. Sure, it’s exciting, but you want some stability and some idea that the company has the finances to push it forward for years to come — to become a greater company than when it went public.
Take a look at Facebook — its IPO was very lukewarm and shares even fell, but now it’s become influential in the public’s daily lives and trades around $180 per share. Nowadays, there are a lot more unique and specialized companies that are going public — so many that it’s hard to decide which one will be around in the next few years.
Kathleen Smith, principal at Renaissance Capital (a provider of institutional research and IPO exchange-traded funds), had this to say:
The IPO window is closing on growth-at-all-costs, highly valued private companies that are trying to come to market with excessively valued pricing.
Things are changing for the IPO market, and it could mean for the better.
Last Thursday, the company Endeavor, an entertainment company that owns sports and modeling agency IMG and mixed martial arts organization UFC, said it will delay its IPO to “continue to evaluate the timing for the proposed offering as market conditions develop.” Before delaying, the company reduced its pricing target expectations, since investors are sensitive toward overpaying in the current market.
Smith said, “It’s called price discovery, and it’s a cleansing process that will make for better days ahead.”
There very well may be more direct listings ahead, which might work a little better for highly valued and well-known companies. The home-sharing company Airbnb announced that it will be going public in 2020, and it could take the route of direct listing to do so.