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The Death Of IPOs, And Why It Matters To You

Tyler Durden's picture




 

The chart below by way of Grant Thornton shows something rather disturbing: in recent months, the number of IPOs that are trading "at or above their issue price 30 days after IPO pricing" has been collapsing in virtually a straight line since the early 1990s, and in 2012 was just shy of all time lows (which have been recorded during periods of great market crashes, not when the S&P is about to hit its yearly highs). As such the lack of success of such prominent recent names as FaceBook, Zynga, Groupon and many others, is not simply a function of valuation and investor sentiment, but related to the ongoing deteriorating in the underlying market structure for a variety of reasons, many of which have been written about here in the past.

Some more visual confirmation of how the US IPO market is on its last breath:

While the fundamental reasons for the death of the IPO are many, one of the underlying causes is the incursion of HFT courtesy of the collapse in of the trade tick size, as technology has played an ever greater role in trading and market structure leading to a two-tiered market (think of its as one for the collocated algos, aka those on steroids, and one for the "rest of us") which in turn has shifted the focus of the market from a discounting mechanism, to one which merely rewards fast response time, and therefore short-term momentum perpetuation, which tends to blow up those long-term investors who do not have a big enough balance sheet to absorb margin shifts in either direction, and broadly favors ultra-short term trading, instead of long-term investing.

 

Sadly, the corruption of IPO market happened with the explicit co-option of regulators, who proposed and enacted regulation after regulation, culminating with the abysmal Reg NMS, that promoted short-term trading at the expense of investing and true capital formation.d

 

Now the cynical out there may say: good riddance. All IPOs do is allow "greedy" Venture Capitalists to cash out at the moment when they and the management team realize the maximum growth potential has occured, and therefore prevents more capital loss by the less sophisticated retail investor. There is that, but there is also the reality that many of the companies that go public use the cash not to enrich their management teams and equity investors, but to invest in the business, to grow, and to hire employees. And as everyone who has lived in the New Normal knows, it is this last category that is mostly lacking not only in the US, but around the world that continues to be gripped in a recession.

 

Sadly, in the new centrally-planned normal all of the above is a moot point.

While the discussion here would have been relevant in a market that had an efficient and unimpeded price clearing mechanism, i.e., one in which market drops were not only allowed but encouraged to eliminate inefficient capital allocation, in which the business cycle had not been destroyed by Keynesian academic central planners, and in which stocks had the "risk" of falling instead of just the "reward" of rising, saving the IPO market would be a noble venture. Sadly, in the world that Bernanke et al have created, there is increasingly little point in pursuing a functioning market when the embedded momentum-perpetuating algorithms are implicit collaborators to the planned melt up which is the only way to mask the pervasive economic collapse resulting form the total disconnect between the capital markets (long since a plaything of central planners) and the economy.

In such an environment to lament the death of the IPO is a just cause, but unfortunately when the entire market is now broken beyond repair, and merely reflects the inability of policy makers to implement fiscal policy instead relaying on endless monetary interventions, very meaningless.

But yes: the number of "jobs not created and definitely lost" as a result of the death of IPOs will be merely yet another unintended consequence of a far bigger phenomenon we have witnessed: the end of the capital markets as we know them. And once it all breaks, again, as it will, people will be shocked, shocked, that nobody could have foreseen this.

Full Grant Thornton presentation below

 

h/t Sal Arnuk

 

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Thu, 09/06/2012 - 14:14 | 2768946 Seasmoke
Seasmoke's picture

so this time they were not able to push them up above $200 a share, before they pulled the rug out......sounds like a good thing

Thu, 09/06/2012 - 14:23 | 2768980 VulpisVulpis
VulpisVulpis's picture

Frankly, I am shocked.

Thu, 09/06/2012 - 15:03 | 2769100 Manthong
Manthong's picture

My worry is our elected public servants and their associates are suffering a decline in insider related income which will turn their attention to stealing more directly from all of us.

Thu, 09/06/2012 - 15:07 | 2769106 LawsofPhysics
LawsofPhysics's picture

Bring it.  It's a lot easier to defend against direct theft.  Think of John Corzine showing up on those farms to inform the farmers they where being robbed.  My guess is things may have turned out a bit differently.  All economies are local, big difference in policies when the people your are robbing are next door.

Thu, 09/06/2012 - 15:38 | 2769191 smlbizman
smlbizman's picture

that whole report is bullshit...the problem with the ipo market is they are telling and selling  you  filet mignon when in fact it is pink slime....and the fucking genius that manage money are just churn machines for the slime ...since i have been reading zh i have been aware of every scam....and if i, not even being the sharpest tool in the drawer is aware of the scam, the fucking asshole running ,lets say calpers or biderselloutman should have known facefuck was a scam et.als.....

Thu, 09/06/2012 - 16:16 | 2769235 Dr Benway
Dr Benway's picture

I agree the article does seem to leave out the key reasons for the death of IPOs. Information asymmetry let the banksters dole out the juicy cuts of IPOs to their friends for years, while selling the offal as filet mignon to stupid retail investors.

 

This could be sustained as long as the markets had inflows and there was a boom, but when the tide receded the legions of silly retail investors to absorb the offal disappeared, and thus also the banskter ability to skim the choice cuts for themselves. Yet another golden goose killed by bankster greed.

 

http://s1144.photobucket.com/albums/o489/_DrBenway/

Thu, 09/06/2012 - 16:34 | 2769343 Omen IV
Omen IV's picture

why are they making it so complicated ? ---- the IPO market is about scamming by the bankers - it is all a contrivance

when Ford launched its IPO in the 1950's there was real value being promoted with a long history of operations and financials to prove the valuation - it went downhill from there - for a long long time - valuations have become a joke of  - promotionally rigged momentum - why? its all about the commissions / fees / rigged shorts / sale of options before the lock up expires..... not sustainable markets - nothing else

Thu, 09/06/2012 - 14:41 | 2769035 LawsofPhysics
LawsofPhysics's picture

How will those vulture capitalist kleptocrats ever extract their pound of flesh.  Wait, am I supposed to feel bad about this?

Thu, 09/06/2012 - 14:16 | 2768947 williambanzai7
williambanzai7's picture

Facebook, Zynga, Groupon...does the word sham mean anything to you?

How about Schapiro?

Thu, 09/06/2012 - 14:37 | 2769033 Slewburger
Slewburger's picture

Max Keiser hits the nail on the head.

Its a casino gulag model. The lives of those in the gulag have purpose; because after all someone has to provide "value" for those in the casino.

The irony is the casino folks are only a few losing bets away from the gulag.

Schapiro works for the house.

Thu, 09/06/2012 - 14:56 | 2769082 NotApplicable
NotApplicable's picture

Works for the house? So does Max Keiser.

At least, I can't think of a single other reason he's gotten on the "smear Mises/Austrian Economics" band-wagon that got going once Rommey selected Ryan (bringing the incoherent Rand into play).

Then add to that, the ignorant insults directed at Tom Woods, which he used to try and cover his ignorance of Mises.

While Keiser might be on the right of the JPM/silver story, he is a fucking stooge of the highest order.

http://www.tomwoods.com/blog/max-keiser-let-me-know-when-you-answer-my-c...

Thu, 09/06/2012 - 23:18 | 2770451 Slewburger
Slewburger's picture

Smear is a strong word, but I agree the Sandeep Daily thing went too far. Max has pointed his finger because the issue started on his show and the Gold Standard Institute reacted. I applaud him for challenging the Mises cult.

Sandeep merely pointed out the frailty of the Mises cult and the fact that it is imperfect. I look at it as sticking up for his guest, which if he apologized could make him lose some street cred. Of course continuing to beat a dead horse can lead to the same thing.

I just don't understand the flip flopping on Tom's part. If he misunderstood, then others could clearly also. Its a half ass apology.

http://www.tomwoods.com/blog/i-stand-corrected/

I've stopped following this because it's really at this point a pissing contest. No winners, and Sandeep has been forced out.

But what was clearly revealed was do not question/challenge Mises from within or you will be punished.

Collecting social security is hardly going Galt. The unquestioning cult of Mises, or any other social science is dangerous.

Thu, 09/06/2012 - 15:04 | 2769089 Floodmaster
Floodmaster's picture

America will become a Potemkin Village

Thu, 09/06/2012 - 16:08 | 2769273 otto skorzeny
otto skorzeny's picture

will become? or has become?

Thu, 09/06/2012 - 14:50 | 2769066 saturn
saturn's picture

How about some Sham-pain?

Thu, 09/06/2012 - 14:21 | 2768955 Dr. Engali
Dr. Engali's picture

The biggest thing that killed the IPO market  off is eveybody saw them for a get rich quick scheme instead of a long time investment. Once Wallstreet had that idea sold to John Q Public they were able to inflate the offering and dump any piece of crap they wanted to on mr. and mrs. retail. The insiders got rich and retail got fucked. I agree it is bad over all because the capital markets no longer function for what used to serve as their original intent. There was a time when you invested in an idea with the hope that it would pay off some time down the road...not the instant it comes to market.

Thu, 09/06/2012 - 15:08 | 2769045 LawsofPhysics
LawsofPhysics's picture

Correct Dr.  Admittedly, both of my brother-in-laws are in venture capital.  When they are bringing a company to market, they talk of those employees with great respect.  After they extract their pounds of flesh, they could give two shits about whether or not the company succeeds or fails.  It is a CONfidence game pure and simple.  Over paid middle men, nothing more.

Thu, 09/06/2012 - 16:02 | 2769254 Dr Benway
Dr Benway's picture

Yeah you're right the tragedy is double - not only are investors scammed by crappy IPOs, but potentially good companies are stopped from capital raising as a result of the decline of capital markets.

Thu, 09/06/2012 - 16:35 | 2769354 defn8Dog
defn8Dog's picture

Enter the US Government, as the IPO market now jumps the shark astride the new JOBS Act with its absurd exemptions from any reporting or accountability.  

Thu, 09/06/2012 - 14:18 | 2768962 centerline
centerline's picture

True organic business growth requires some ability to forecast and access to reliable and trustworthy capital markets.

Clearly an epic fail on both accounts here.  Neither is possible.

But, if honest capital formation was the goal, maybe there would be some clean up in the financial sector.  Hmmm, maybe some arrests.  Maybe the SEC grows a pair.  Maybe our leaders would pass some meaning legislation and actively repeal the bullshit laws that work towards the opposite effect, Etc.

The fact that none of this has happened says everything anyone needs to know.  Capital markets now have a flashing "Casino" sign on them.  Yeah, the game has always been rigged.  But now, it is total system capture.

Thu, 09/06/2012 - 14:20 | 2768969 kevinearick
kevinearick's picture

blind mice at a wall running out of food...

Thu, 09/06/2012 - 14:23 | 2768981 vintageyz
vintageyz's picture

Could it be that Farmville has a drought too?

Thu, 09/06/2012 - 14:38 | 2769025 Floodmaster
Floodmaster's picture

Keep your jewdar open and don't play rigged games – DON’T BE A SUCKER.

Thu, 09/06/2012 - 14:47 | 2769064 bdc63
bdc63's picture

the title of this article is dead wrong ... it doesn't matter to me one iota ...

Thu, 09/06/2012 - 14:56 | 2769081 realtick
Thu, 09/06/2012 - 15:07 | 2769090 slewie the pi-rat
slewie the pi-rat's picture

this is very provocative and t.y. tyler and whatever "qualified" financial journist is doomering with or for you today , too

this analysis, like so much here on zH is

  • correct
  • grossly incomplete

i think this does address some of the issues ipos have faced and yes they haven't done as well since the dot-com boom, have they?

let's focus on the last few years since the crash, ok?

when TSHTF, there was a himalayan range of debt which need to get re-funded and also the goobermint(s) were needing cash too

under the bailout economics (not whether it is "good" or "evil") as it is being practiced for systemic stability (which may not be achievable, but it is still at least ostensibly viable) the original question or gazillion were around "is this even possible"? 

i didn't think it was;  no fuking way jose!  but i was wrong, at least so far

so now, i just don't know the future and only "predict" that tomorrow will be "stable" 

so that is my first point :> there has been a tremendous demand for "money" and it is being met by the most craziest mostest zanyest hi-jinx in bankstering engineering-hi-jacking herstory

second :> the "participating broker-dealers/financial combine" priced them!  for their own and the issuers' needs to all be met as well as possible;  and in this "market and demand for risk" they took care of themselves pretty well so let's give them a big round of applause, folks!

third :> there has been a ton of corporate debt issued both investment-grade and junk and daBoyz or the managers would rather take the bird-in-hand under zirp than speculate that a revenue stream will emerge from some bullshit marketing plan

and yet these companies are now out there doing stuff with the IPO money and the have the "superMoney" thing going for themselves, even if it may be a while or never to get the next few billion outa the "capitalist ground"

no, their prices have not soared, post-issue, in general

but that doesn't necessarily mean the IPO market is d.e.a.d.

it is simply the IPO market to most and we don't need to go into another "ain't it awful" chorus

there may be nothing "wrong" given the political decisions made in 2008 and 2010 for the USA

things still suck in the long-term and the pols should address it, but they are paid not to in order to allow thePeople to get "milked by corporations and special interests (AMA) (Joint Chiefs + Israel Lobby)who buy our elections" with money

free speech money!  L0L!!!  b/c the supremes said they could!  Hahahahaha!

this is the basic problem with "america" and we all know it, too

 

Thu, 09/06/2012 - 19:05 | 2769787 centerline
centerline's picture

Good points.  Solid too.  But all point towards an acceleration in change instead of stability.  Financial free-for-all.  Get it while it's good because it ain't gonna last.

 

Thu, 09/06/2012 - 15:23 | 2769141 johnQpublic
johnQpublic's picture

maybe it has something to do with the fact that recent ipo firms dont even have a product

 

how is groupon not just plain gone yet?

it is no sort of sustainable business...more of a fad

facebook?

same

people will tire of it

 

and i had to google zynga just to find out what it was

free games? wtf

Thu, 09/06/2012 - 15:51 | 2769229 aerojet
aerojet's picture

I can summarize the IPO problem more succintly--not enough bag-holding suckers left for these "sold to you" clusterfucks.

Mon, 09/10/2012 - 03:34 | 2777746 matrix2012
matrix2012's picture

QUICK SOLUTION:

drop a much bigger EBT and allow (read: push) it to be used for buying stocks. BULLISH !!!

Thu, 09/06/2012 - 16:35 | 2769355 Rocket-Man
Rocket-Man's picture

"in recent months, the number of IPOs that are trading "at or above their issue price 30 days after IPO pricing" has been collapsing in virtually a straight line since the early 1990s..."

 

I get the downward trend but if that's what Tyler calls a straight line then he can pass a field sobriety test at 3AM after downing a quart of Grey Goose.

 

I see cycles spanning 60% of the "Success Rate" chart, over 1 years time or more,  but maybe I am looking too hard at the data.

 

To make it worse, looks to me like all the charts show a time axis  measured in years from early 90's to present.  What's with the "recent months" statement in the lead in?

 

Looks like the last cycle peak in 2009 to 2011 spent a fair time above 50% success rate and even breached 60%.  I would hardly call that a "last breath."

Call me at the very least skeptical about your pronouncement of "the death of the IPO."

Thu, 09/06/2012 - 18:35 | 2769712 Tombstone
Tombstone's picture

You are witnessing the rise of central planning and the death of capitalism and free markets.  Everything is now controlled by either the White House, The Fed, Goldman Sachs or the super-rich, like Soros and the Oracle.  Please feel free to order you own personalized set of chains from Amazon and forget the Kindle; as eventually all books will be banned except those supporting the State.  Rock on, USSA.

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