The IPO Market: What’s still holding it back?

For the past five years, both Washington and Wall Street have been trying to increase the number of companies going public. In the government’s efforts, a Business Startup Act was signed in 2012 so as to give businesses an easier time in the process of having an Initial Public Offering. The Jumpstart Our Business Startups (JOBS) Act was put in place to enable upcoming businesses to raise funding more quickly to spur growth in the economic sector. The bill reduced the security regulations that were previously required for companies to raise money and as such, made expansion prospects appear better for many businesses.

Half a decade since the bill was signed shows us that it might not have had as much of an impact as the United States government had expected it would. The country has just come from one of its worst years concerning listings and stock values. 2016 had the lowest rate of market activity since the financial crisis that occurred in 2009. The decreased number of listings in the past five years have caused an uproar. Many firms have expressed their will to remain privately held and have stuck to their privately-owned status. This has been despite the short-term gains in momentum for the IPO market crowned by Snap Inc. in the first quarter of 2017, which could have possibly encouraged more companies to file for their offerings. So why are markets still so slow? We explore some of the potential reasons below.

  1. Alternative funding options

Over recent years, companies have been able to secure significant amounts of financing while undertaking cheaper debt. Previously, high credit charges discouraged investors from taking on debt and prompted them to seek revenue from Initial Public Offerings instead. Nowadays, however, firms can take on debt with lower interest owing to the vibrant private financing market. Enterprises such as Uber and Airbnb for example, have been able to raise billions of dollars in funding without making appearances on trading floors.

  1. Publicizing Accounts

Under the Jobs Act, all firms with a high number of shareholders are required to publish their accounts. This would include their operating revenue, expenditure, losses or profits and so on. Most companies prefer to hold such information privately for administrative purposes and so as to remain unreadable by competition. As such, the publishing of these financial details discourages companies from having issuances.

  1. Mergers and Acquisitions

There has been an increase in the number of companies preferring to sell off their businesses to other larger corporations within the same field. Additionally, more firms are preferring to merge with others in a bid to serve a wider span of clientele and as such raise higher revenue and avoid competition. With a larger market pool and lesser competition, the new business under the companies that have joined forces can serve more people and as such increase profits and growth potential.

In the 90’s, acquisitions contributed to only 20 percent of successful business ventures: the rest were from successful IPOs. However, the period from 2001 to 2016 has had the number of acquisitions dominate the market. They have contributed to 90 percent of these ventures, therefore slowing the IPO market down.