December 19, 2016

Though the public markets have seen some impressive debuts of technology companies over the years, 2016, has, thus far, been a notably dry year for IPOs. As 2017 approaches, analysts, investors and journalists alike are increasingly asking: Is the IPO market going to come back?

Many say that 2017 will be a banner year for IPOs, while others caution that the volatile public markets will cause new issues to continue at a faltering pace. As always, however, the IPO market is driven, as all capital markets are, by supply and demand. Supply, in this case, is the number of private companies that have matured to the point of being “ready” to go public, a number which has risen quite high. The billion-dollar question is whether demand will match the large and growing supply.

Demand is shaped by many things, including the sentiment of public-market investors and, with world events and uncertain fiscal policies keeping the public markets turbulent, it’s difficult to predict what kind of demand there will be for IPOs in 2017. The IPO market could come roaring back. It could also creep back slowly. One thing to be certain of is that when it does return, it will look very different than it did in the past.

It’s Time for New Thinking

Instead of pinning our every hope on the resurgence of the IPO market, we would be better-served to ask how can value can be realized no matter how 2017 shapes up and, in short, make the best of what we’ve got. We should be mapping out new strategies for company founders, employees, and investors to succeed in a world that’s likely to remain volatile and uncertain, rather than asking when things will “get back to normal.”

Private companies exist in a very different world today than they did even as little as a decade ago. The option to remain private long-term, which was virtually non-existent in the past, has created a new normal, and it’s time to learn how to make the new normal work for everyone.

Companies today no longer face the need to go public in order to scale up and dominate entire industries. They don’t rely solely on public-market investors for the capital they need to become global leaders. And the venture capitalists and angels backing these companies don’t need to wait for the one, final payday that comes with crossing the line from private to public.

Where there was previously a distinct dividing line between companies that are privately held and those that are publicly traded, that line has become blurred as valuable private companies delay or decline the chance to go public.

To extract more value from the private markets as they are today, it makes sense to consider looking beyond the historical divide between private and public, and begin viewing late-stage private companies the way we have traditionally looked at certain public companies, as they are two sides of the same coin. If this concept resonates, then it also makes sense to apply relevant public market valuation and analysis techniques to this new and growing late-stage asset class.

Private-Market Deals Are Now More Orderly, Structured

The most successful deals in the late-stage private markets are completed with the fully-informed, willing participation of buyers, sellers, and company leadership. Indeed, long-term, strategic institutional investors have been increasingly interested in taking positions in late-stage private companies, bringing interim liquidity to early investors and employees with stock options, and helping to clean up the company’s capitalization table in the process. These kinds of transactions aren’t simply pipe dreams, but are happening more and more in today’s markets. They’re not a replacement of the IPO by any means, though increasing interest in such transactions certainly means private companies have less of a reason to go public before they’re ready. Having such a powerful liquidity option is a great alternative for many private companies, and I expect it to continue.

Bringing structure, transparency, and elements of public company fundamental analysis to the private markets is decidedly a new approach, but is critical for realizing value from the markets as they are, rather than waiting for them to return to familiar territory. If it’s one thing recent years have taught us in the public markets, it is that there many unprecedented events to which we must all adapt. The bottom line is that liquidity is available in private markets now, whether next year or the following years are banner years for IPOs or not.

The world has changed, and private companies are flexing their strength in a way that we have not previously seen. It’s time to stop asking when things are going to get back to normal in terms of IPOs, as there are other options for getting liquidity today. By being flexible in their mindsets, and with more orderly private markets, all stakeholders can gain no matter what the scenario.

Meet the author
Jane Leung
Managing Director
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