- This year was supposed to be the year of the unicorn IPO, with massively funded private startups like Uber, Lyft and Slack all preparing to go public.
- Now just two weeks into the year, bankers say it’s turning into a “shitshow.”
- The federal government shutdown has left the SEC closed, which means most companies cannot move forward with going public.
- Market volatility is also roiling markets and creating an unstable environment for soon-to-be public companies.
Ask any banker which of the multi-billion dollar startups will go public first in 2019 and the answer is a sigh of resignation.
Back in December, 2019 was set to be the year of unicorns and with windfalls for patient investors, equity-vested employees and gleeful investment bankers alike. Now, just two weeks into the year, bankers have a new way of characterizing the tech IPO market: “a shitshow.”
For the most part, bankers said, tech IPOs are at a standstill. And that means bankers aren’t getting paid tens of millions in underwriting fees (not to mention bragging rights) they expected to land this year
Meanwhile, those banks are bracing for painful fourth-quarter results after facing a very difficult December amid market volatility.
IPOs on pause from Cloudflare and Zoom to Beyond Meat
Lawyers, who handle most of the initial public offering filings with regulatorsy, can’t get paperwork approved since employees at the Securities and Exchange Commission have been out of commission due to the federal government shutdown.
“The biggest impact is for people that are trying to get out right now. There’s no good way to do that,” said Tom Holden, a partner at Ropes & Gray. “Longer horizon IPOs are moving forward. It’s not like people are just shutting down all together. We just don’t know when the SEC is going to open its doors again.”
At the end of 2018, bankers told Business Insider they expect to see around 50 IPOs this year, and many said they expect the deal value to be around 2018’s total of $19.8 billion.
Companies like Uber and Lyft, which both confidentially filed at the beginning of December, reportedly have not seen comments on their first draft.
Others like Cloudflare and Zoom held bake-offs to pick underwriters in early fall and were on track to file in early January, but have put it off due to the government situation, according to one source.
Sure, back in December the biggest question on everyone’s minds was market volatility. Tencent Music went public in mid-December and suffered for it. But others, like Beyond Meat, Revolve, and Virgin Trains, filed publicly at the end of the year. They are ready to go but still haven’t listed.
And while volatility remains a factor, some believe that the shutdown is taking time out of a precious window of opportunity when investors are eager to see new assets on the public markets.
“There’s a perception right now that the market is open and that there would be demand for IPOs,” said Kenton King, a partner at Skadden, Arps, Slate, Meagher & Flom. “That’s not always the case and the IPO market is notoriously volatile, even in the best of times. When there’s demand for new issuances, you want to get out and you want to get it done.”
Don’t expect a tech IPO before spring
If and when the federal government opens back up, the paperwork pipeline will likely be backed up. But people close to the process told Business Insider not to expect a race to the public markets, especially not after February 14.
Once mid-February hits, companies will be obligated to provide the SEC with updated financial information, which means anything filed before then will be considered outdated, multiple lawyers told Business Insider.
After February, 14, it will take companies a few weeks to get their audited financials together. This will most strongly impact companies which follow a calendar year schedule and whose full year financials will need to be audited, in addition to quarterly financials.
A company has to publicly file, price and list on the public markets before February 14 for it to be legally sound.
That process takes 3.5 weeks to a month for companies which have not already filed publicly, according to Holden. Once a company files publicly, it has to wait two weeks before going to the roadshow, where executives and bankers tout the company to institutional investors.
“The issue is, people time their filings in order to hit specific windows,” King said. “You work back from when you think you will price, and when your financial statements will go stale. This throws the entire timing off.”
And if the federal government stays closed for “months or even years,” as President Donald Trump threatened last week?
“There’s not really a plan B. The plan B will be M&A activity for some companies,” said Holden. “For the big companies that aren’t in dire need of money, they can ride it out. But there will be companies who really need the money, and if they can’t access the capital markets, and there’s not private money available either, then M&A is the next option.”