The current IPO market is ‘broken,’ says IPO ETF creator— here’s how

FAN Editor

Call it an issuer issue.

Recent failures in the world of initial public offerings — WeWork’s botched debut being the latest and most high-profile — are largely the fault of the companies themselves, says Kathleen Smith, the co-founder and chairman of Renaissance Capital, which runs U.S.-based and international IPO ETFs.

“The existing IPO market is not broken from an investor standpoint; it’s broken from the issuer standpoint,” Smith told CNBC’s “ETF Edge” on Wednesday. “So, it’s because the issuers, the private companies, have been overvalued privately.”

WeWork’s valuation collapse from the $47 billion assigned to it by SoftBank — the co-working company’s biggest backer-turned–majority owner — to below $15 billion by the time it pulled its IPO filing exemplifies that problem, Smith said.

Twenty-eight of the 80 companies that went public in 2019 — including Uber and Lyft, which have fallen 18% and 33% since their debuts, respectively — were valued at $1 billion or more at the time of their IPOs.

But WeWork’s ultimate failure also highlights how much more disciplined today’s stock market is relative to that of the 1999-2000 dot-com bubble, Smith said.

“I think that WeWork is an example of why we’re not yet at 1999,” she said. “In ’99, WeWork would’ve happened.”

“We do get the irrational exuberance, there’s no doubt. All markets get it,” Smith said. “But the fact that the IPO market rejected WeWork tells you something about the sentiment and the knowledge of investors in the marketplace.”

That heightened awareness among IPO buyers will likely persist in 2020, Smith said, adding that she expects more offerings in the first six months of the year as issuers try to get out ahead of the presidential elections.

“Because there’s so many private companies that have been private so long, we’re going to see some really big companies tap the IPO market … in the first half,” she said.

Smith said the makeup of today’s IPO investors will help her case, emphasizing that “the existing public market is filled with a lot of pros who aren’t [going] to pay up for the price and will walk away” when faced with an overvalued market newcomer.

As for what Smith, whose firm’s U.S.-based IPO is outperforming the S&P 500 by more than triple so far in 2020, is watching now, she had her eye on two of the new year’s top filings: OneMedical and Reynolds Consumer.

“OneMedical you have to look at because it’s one of the few companies that has accelerating revenue growth. And with a new company, to see revenue growth accelerate means a lot of eyes are going to be on this health-care clinic company,” she said. “It’s not profitable, but the idea is that that fast revenue growth will make it.”

Reynolds Consumer, the company behind Reynolds wrap and Hefty trash bags and potentially this year’s first $1 billion-plus U.S. IPO, offers a different type of investment.

“What is really profitable is Reynolds Consumer, but it’s not really growing,” Smith said. “So, when the market gets jittery, we’ll be happy to own Reynolds Consumer. When the market’s [strong], we’ll want to own OneMedical. And the thing is that this year, given the performance of the ETF, it tells you about how investors feel about the IPO market. So, it means that we’re going to start out this year with investors that are interested in the new companies.”

Renaissance’s U.S.-based IPO ETF (IPO) fell nearly 2% in Friday’s trading session. Its international counterpart (IPOS) was down less than half of 1%. The strategy behind the funds is to purchase shares of the largest, most liquid companies entering the public markets and refresh their holdings on a quarterly basis.

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