The Death Of IPOs, And Why It Matters To You

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