NEW YORK – Despite major challenges for potential investors in companies that are going public—including a dearth of profits, growing corporate-governance concerns and relatively high valuations by pre-IPO private capital investors—the IPO market was resilient in 2019. Perhaps the biggest surprise is that the new normal of IPOs last year—from multi-class super-voting structures to founder entrenchment—had little to no impact on pricing or trading, according to “Going Public: The U.S. IPO Report,” an in-depth examination of the U.S. IPO market in 2019 from Paul Hastings LLP, a leading global law firm.
The report examines data from more than 60 IPOs, covering both domestic and foreign issuers, that priced in 2019. Its findings shed light on several trends with implications for the year ahead—and suggest changes may be coming down the pipeline in 2020.
“Our report, which we produce semi-annually, provides an in-depth look at the state of the U.S. IPO market. But we see it as just the beginning of the conversation. Our team will be reviewing IPOs on a real-time, continual basis and developing period-over-period and other analyses that provide us a distinctive competency in approaching and executing IPOs,” said Frank Lopez, co-chair of the Global Securities and Capital Markets Group at Paul Hastings. “This year’s report demonstrates that the IPO market was resilient in 2019,” he added.
“As the Paul Hastings’ report highlights, 2019 had all the makings to be strong for IPOs—market valuations were in general high, which made for good IPO valuations,” said Reena Aggarwal, Professor of Finance and Director of the Center for Financial Markets and Policy at Georgetown’s McDonough School of Business. “The takeaway from 2019 is that 2020 should be a strong year for IPOs, however, investors will be attentive to governance, valuation, and future profitability,” she added.
Top insights include:
- While deal volume was down, overall there were solid pricing and strong returns
Approximately two-thirds of issuers priced at or above the midpoint of the pricing range set before their road show. However pricing was notably stronger in the first half of the year, with approximately 75% of issuers pricing at or above the midpoint compared to only approximately 52% in the second half. IPOs under $100 million priced below the midpoint of the range more than half of the time, while IPOs over $750 million priced at or above the midpoint of the range over 80% of the time.
- Most IPOs in 2019 were by unprofitable issuers and a large number were pre-revenue
Approximately two-thirds of issuers in 2019 IPOs had a net loss in the most recent fiscal year prior to the IPO. In addition, one out of every five IPOs were pre-revenue, with over half of life sciences or biotech companies going public pre-revenue. The two-thirds of issuers presenting net losses on a GAAP basis likely drove the 44% of IPO issuers who presented non-GAAP financial measures such as EBITDA or Adjusted EBITDA to highlight their potential paths toward profitability.
- Multiple class structures are on the rise
IPOs with multiple classes of stock were more common than ever, with approximately 39% of IPOs having two classes of stock. The trend toward issuers with multiclass voting structures that are 20:1 or 10:1, representing more than 70% of those issuers with multiple class structures, seems to be more common than the historical 3:1 and 5:1 structures. Of those issuers adopting multiclass voting structures, approximately 58% had a 10:1 ratio while approximately 17% had a 20:1 ratio. The use of multiple class structures was meaningfully greater in larger IPOs (73% in IPOs with over $750 million of gross proceeds vs. 25% in IPOs with gross proceeds under $300 million).
Other insights include:
- Despite some large high profile IPOs, the broader trend has been away from “mega IPOs” and toward smaller cap IPOs
- Shareholder enfranchisement is on the decline, with only about one-third of issuers in 2019 allowing shareholders to act by written consent and only one-third allowing shareholders to call special meetings. In addition, almost 90% had advance notice bylaws, and almost 80% adopted forum selection clauses. Majority voting was less common, with only approximately one-third of IPO issuers requiring majority voting in uncontested elections.
- The SEC review process continues to be streamlined with a continued lower average number of comments.
- More than half of Emerging Growth Companies (EGCs) have been using “test-the-waters” accommodations, which allow issuers and underwriters acting on their behalf to engage in communications with those that are or they reasonably believe to be qualified institutional buyers or institutional accredited investors prior to a formal road show.
- Approximately 76% of life sciences and biotech IPOs followed private placements prior to or concurrent with IPO, as did approximately 63% of IPOs under $100 million.
- The U.S. IPO market experienced an uptick in China-based issuers, many of which were organized in the Cayman Islands, which represented more than half of all Foreign Private Issuers that went public in 2019.
- Two years of financials is the new normal, with 67% of EGCs presenting two years of audited financial statements and 58% of EGCs presenting two years of selected financial statements.
- Equity stock ownership programs continue to be an important compensation and recruiting tool, and over 60% of IPO issuers are going public with equity compensation plans that contain “evergreen” provisions that automatically increase the number of shares reserved for issuance under the plans, without requiring further shareholder approval. Almost 60% of issuers are also going public with employee stock purchase programs, most with similar “evergreen” provisions.
For the full report, visit https://www.paulhastings.com/IPOReport2019/
From startups to public offerings, Paul Hastings’ Securities and Capital Markets Group draws on extensive experience with public and private offerings of equity securities to provide market insights to clients. The sophisticated global practice represents clients in key industries, including energy, financial services, technology, industrial, life sciences, real estate, and REITs. Paul Hastings lawyers advise a broad range of companies on Sarbanes-Oxley, Dodd-Frank, JOBS Act, and stock exchange requirements, as well as compliance with Exchange Act-governed SEC reporting, proxy solicitations, and disclosure obligations.
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