IPO failures show the market is growing up - Financial Times

In the recent past companies coming to market wore their losses as a badge of pride. They were a sign of ambition, scale and speed of growth. Now the public market has seen through that.

The planned initial public offerings of WeWork, the office rental company, entertainment group Endeavor and fitness equipment maker Peloton were a test of investor appetite for lossmaking companies that burn through cash to grow. WeWork’s plans collapsed after investors sounded the alarm not just over the group’s increasing losses, but its complex corporate structure and the influence of founder Adam Neumann. The company was valued at $47bn at its most recent private funding round — more than ten times the £3.6bn market value of IWG, its profitable London-listed rival.

Peloton, whose business is based on stationary exercise bikes with screens that broadcast live workouts but which sold itself as the next technology stock, succeeded. Its shares, however, closed more than 11 per cent lower on their first day of trading last week. It holds the dubious honour of the third-worst opening among companies valued above $1bn. Endeavor pulled its own offering after a lukewarm reception from prospective backers.

Investors should shed no tears. The discipline of the public market worked as intended. Greater scrutiny saw through the hype that had allowed WeWork and Peloton to brand themselves as technology pioneers with a valuation to match. It exposed the weaknesses in the companies’ business models and, in the case of WeWork, the dangers of buying into the cult of a supercharged founder.

The performance of other companies that listed this year, including Uber and Lyft, has also been poor; shares in the ride-sharing groups still trade well below their IPO price. The pursuit of growth and market share remain valid strategies. But, 20 years after the dotcom boom and bust, today’s investors are more mindful of profitability — or at least a clear path towards it — as a metric for value.

While market discipline is welcome, there is still concern if these high-profile failures deter other entrepreneurs or companies from tapping into the public market. A wealth of private funding is available from the likes of sovereign wealth funds and private equity. Recent figures show private equity dealmaking has soared to its highest level since the lead-up to the financial crisis, on the back of a build-up of capital.

There has been a marked shift in capital markets as the number of public companies has shrunk; in the US, the number of listed companies stands at just over 4,000, half its 1996 peak. Europe has also contracted, albeit to a lesser degree.

There is a wider issue to consider if companies start eschewing public markets. If start-ups go through their initial growth phases while still in private hands, it is those owners — not retail investors — that stand to reap the big returns. There are valid concerns that public markets could become the preserve of mature, low-growth businesses.

The recent failures signal a return of a dose of sanity to the IPO markets. There is still appetite to support young companies with a sound business plan. Overall, backers of new companies coming to Wall Street have done well. Shares in social networking site Pinterest remain above their offer price, signalling in part greater demand for tech companies with a business platform. Market experts caution that 2019 is not — yet — 1999. Two decades after the dotcom bubble burst there are signs the IPO market is growing up.

2019-09-29 09:54:00Z
https://www.ft.com/content/7c8e6688-e120-11e9-b112-9624ec9edc59