Will public, private markets deliver an encore in 2015?

After months of hype and breathless anticipation, the Alibaba Group — China’s answer to eBay and Amazon — raised $25 billion in its market debut in September, setting a record for initial public offerings (IPOs). Not three months later, the car-ride startup Uber raised an eye-popping $1.8 billion, one of the biggest fundraising rounds in venture capital history.

In other words, it was a very good year for the business of raising money — in either the public or the private markets. Still, investors and advisers are beginning to question whether that performance can be repeated this year.

Last year proved to be one of the busiest since 2010 for companies seeking to list on the stock markets. Some 1,205 issuers raised nearly $249 billion globally, according to data from Thomson Reuters. Even stripping out Alibaba’s blockbuster offering — an event bankers and investors agreed was a once-in-a-generation type of deal — made last year a banner one for IPOs.

The quest for growth has prompted some analysts to question whether investors and startups are becoming a little too starry-eyed for their own good, potentially overinflating the markets. Comparisons have been made, though so far largely dismissed in Silicon Valley and on Wall Street, to the dot-com boom and bust of 1999-2000.

Lending Club’s successful IPO, for instance, valued the online lender at more than 35 times its estimated revenue for 2017, more comparable with internet darlings like Facebook than financial firms like Visa.

Still, venture capitalists and stock underwriters have shown an eagerness not to miss out on the next potential game-changer. The previous year, 2013, was already considered one of the most productive for IPOs since the financial crisis, with companies as varied as Twitter, Hilton Worldwide and animal health company Zoetis gaining stock listings.

Fundraising last year was more concentrated in a few sectors, with the technology and financial sectors alone making up more than a third of all offerings through IPOs. Those included the offerings of GoPro and Ally Financial, the former finance arm of General Motors.

About 40 per cent more companies went public in 2014 compared with the previous year, and, excluding Alibaba, raised almost 36 per cent more money. Overall, activity in equity capital markets, raised $890.3 billion worldwide last year, up nearly 11 per cent from the same time in 2013.

“We had high hopes for 2014, and we weren’t disappointed,” said Paul Donahue, a co-head of equity capital markets for the Americas at Morgan Stanley.

11-digit startup valuations swell
At the same time, startups raised enormous sums of money by turning to private investors, fetching valuations that rivaled those of publicly traded counterparts. Uber’s enormous fundraising round valued the company at $40 billion, more than twice the combined market capitalisation of Hertz Global Holdings and the Avis Budget Group.

Other startups joined the 11-digit valuation club, whose members are valued at $10 billion or more, including Airbnb, the home rental service; Dropbox, an online file-sharing service; and Xiaomi, a Chinese smartphone maker.

Overall, 192 of the top technology startups tracked by the research firm CB Insights in 2014 raised $12.9 billion in new funds. By comparison, a similar set of the companies that the firm tracked in 2013 raised about $5 billion.

Behind the wave of fundraising in both the public and private markets are many of the same factors that have been at play in recent years. The economy has continued to recover since the financial crisis, propelling the stock market to new heights.

Flows into stock funds focused on the United States have remained strong, with $36.5 billion in the week that ended December 24 alone. More important, prolonged low interest rates have continued to push investors to find higher growth investment opportunities. IPOs have proved one of the more popular outlets for that enthusiasm, with many sought-after companies experiencing strong first-day performances.

But with the strong stock market last year, investors might have fared just as well investing in the general market rather than chasing every IPO. An index maintained by Renaissance Capital, which tracks the performance of the top 80 percent of newly public companies based on market capitalisation, found that IPOs had about a 7.2 per cent rise in 2014. The Standard & Poor’s 500 index did better, with a gain of 11.4 per cent last year.

And investors in venture capital opportunities, a group that has expanded to include huge mutual funds, private equity firms and hedge funds, have wagered that the companies into which they have been pouring money will eventually go public at even higher valuations. Alibaba, for example, was valued at about $30 billion during a private fundraising round in 2011; its IPO valued the company at $168 billion.

“People who used to invest in interest-generating products have moved on to other opportunities,” said Alfred Lin, a partner at the venture capital firm Sequoia Capital.
And Donahue of Morgan Stanley added, “Investors, no matter how crowded the calendar is, will covet demonstrable growth stories.”

Investors and companies hoping to go public were not always bullish last year, especially after downswings in the stock markets caused temporary hiccups in the fundraising markets. A brief pause in investor confidence in highflying stocks whose chief attractions included the speedy run-up in their prices sent some prominent names in the technology and pharmaceutical sectors down sharply this spring. (Most of those companies, like the electric-car maker Tesla Motors, have since recovered)

Still, startups and their investors and advisers insist that they are being disciplined. Lin of Sequoia argued that many of the startups looking to sell stock publicly or privately have real businesses. Maybe not actual profits yet, but most are on the path to some kind of sustainable earnings.

And as for IPOs, investors are applying some pressure on the valuations of companies coming to market, according to bankers and investors, keeping something of a lid on many of them.

“Even if there are poor-quality companies going out to market, investors aren’t going to allocate money to them,” Lin said.

Unlike the past year, there is no mega-IPO already lined up for the public stage. Many are hoping that Uber will pursue a public stock listing — and its recent fundraising round included financial incentives to do so within four years. But it is still contending with a welter of regulatory challenges around the world that may push back a listing. Airbnb is also facing similar pressures as it expands. That said, investors in both companies have wagered that their legal troubles are surmountable.

Still, startups like file-sharing company Box are scheduled to go public. Just last week, Shake Shack announced it would go public, hoping to follow splashy debuts by several other restaurant chains this year. And highly visible businesses like Pinterest, the health-tracking company Fitbit and Vice Media, remain the subject of fevered speculation about their plans.

Meanwhile, private equity firms that acquired businesses through leveraged buyouts will most likely look to sell their holdings through IPOs and generate real profits from their investments. One such company, the internet services provider GoDaddy, is expected go public within the first half of the year.

Any bets on which companies will pursue an IPO or a big fundraising round, ultimately, will depend as much on factors well outside any executive’s control.

“The backlog of deals is strong, and we expect more of the same in 2015, assuming no macro or geopolitical surprises,” said John Daly, the head of Americas equity capital markets for Goldman Sachs.