2018 IPO trends and outlook
There's been a discernible trend in recent years towards declining IPO volumes. There's several reasons for the decline. First and foremost, the biggest reason in my opinion is the significant amount of capital formation since the financial crisis of 2008 around targeting private companies. So companies can afford to stay private for a longer period of time.
Tech is a great example, where you've seen an enormous amount of capital being raised in the private markets by tech companies, thereby enabling them to fund their business and stay private for a longer period of time. And it's one reason why we've seen an explosive growth in the number of unicorns over the last several years.
There are also sector-specific trends that are impacting the IPO market. Energy for instance. Given the pressure on gas prices and the negative outlook for oil over the next several years, combined with the perception and the view that there was over-investment in the energy sector, that's compressed and really caused the IPO market to come to a halt.
Financial sponsors is another example. Given the inclination on the part of private equity firms to monetize their portfolio companies through the M&A market, rather than the IPO market, that has caused IPO volumes with private equity backed companies to decline as well.
The prevalence of SPACs, Specially Purpose Acquisition Vehicles, and some companies looking to do direct listings, those have also contributed to the decline in IPO volumes although again, to a much lesser extent.
Outlook and market environment
Despite the longer term trend of declining IPOs, we've actually seen a significant uptick in the number of IPOs in the first half of 2018. And that really came from two sources, tech and biotech. So now tech and biotech companies can achieve public market valuations that are as high or higher than their private market valuations, which is the way it should be. We would expect that that trend would continue for the remainder of this year and into next year.
Given that we arguably are in late stages of both the economic cycle as well as the equity cycle, we would expect that more and more companies across all sectors will look to tap the IPO market rather than wait. Through the balance of this year, the buy side will remain very cautious around cyclical, highly leveraged businesses given where we are in the economic cycle. IPOs will happen, but they're gonna be priced more appropriately.
For growth areas, for areas where we're seeing trends in innovation, particularly around tech and biotech, those are the sectors where the buy side will reach for valuations.