Investors likely won’t get their fix for newly public companies for a long time thanks to the financial turmoil caused by the spreading coronavirus.
Logistics issues aside for investment bankers unable to travel, market volatility like this scares off companies who want to raise capital.
The initial public offering calendar is looking sparse this year, with many road-show ready companies, like Warner Music, Madewell, Cole Haan, and Atotech, pumping the brakes. The highly anticipated IPO for short-term home rental company Airbnb, which said it intended to go public in 2020, could be shelved as the coronavirus dents the travel industry and the economy slips into a recession.
Since 2010, it’s taken an average of one month to see three or more IPOs in a week, following a period when the Cboe Volatility Index, a “fear gauge” also called the VIX, spikes over 30. The VIX topped 70 on Thursday.
Smith explained that after a company is valued next to its peers already in the public market, a discount for volatility is slapped on the price.
“Then you’re going to have to take a very big discount because instead of volatility being 13% to 15%, it’s now 30% to 60%,” Smith added. “It becomes a very bad price in order to attract investors, so IPOs don’t get done.”
Alongside volatility, an economic downturn could hurt IPO valuations. When businesses of peers are struggling because of weakness in the economy, IPOs are also punished, said Smith. Plus, investors are less willing to take risks while uncertainty reigns. Smith said a similar dry spell for IPOs occurred at the end of 2018 when the U.S.-China trade war spooked investors and punished equities.
VIX LONG (Buy)
ENTER AT: 56.40