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US IPOs head into turbulent markets complicated by government shutdown

The partial federal government shutdown and potential turbulence in equity markets may make it tough for U.S. IPO activity across a number of sectors to reach the same level this year as in 2018, capital markets advisers said.

Companies poised to come to market early in 2019 are stuck because SEC staff, like thousands of other federal employees, are furloughed and unable to review requisite registration statements and declare them effective.

"The shutdown is a live topic for me now, as we have an IPO that is eager to start their roadshow," David Oelman, a Vinson & Elkins LLP capital markets and M&A attorney, said in an interview. "The plan was to go as soon as we could in the new year."

Although Oelman commended the SEC for having improved the efficiency of its processing in recent times, he underscored the worsening market environment.

"As market volatility has increased, market windows have opened and shut more rapidly than perhaps they have historically," he said.

Last year was another good one for U.S. IPOs. There were 191 offerings, raising almost $36 billion in gross proceeds, according to S&P Global Market Intelligence data.

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Yet by the end of the year, volatility was a growing theme for capital markets, putting advisers and investment banks' underwriting revenue at risk. Volatility led to an uptick in trading volume, but it also "came with a material decline in asset prices and a diminished level of investor risk appetite," Credit Suisse analysts said in a Jan. 3 report.

By Dec. 24, 2018, the S&P 500 Index was down nearly 15% from the beginning of the month. Since then, it has climbed more than 11% to close at 2,616.1 on Jan. 16.

The first couple weeks of January are typically when the IPO engine switches into gear, David Ethridge, U.S. IPO services leader at PwC, noted. "People come back from the new year, they're looking to kick off roadshows, and [by] the second, third week in January you see those [IPOs] price."

When IPOs are delayed to later in the year, it becomes harder to use a company's current financial figures, Ethridge added. Many companies that are not able to price by mid-February will have to update their nine-month financials, he said.

There are also sector-specific issues. Energy companies are particularly sensitive to commodities prices, and a change in those prices could add further reason to hold off going to market. After OPEC members discussed possible oil production cuts at a late-December meeting, the price of oil rose. Brent Crude is up nearly 13% since the year's start, closing at $60.53 a barrel Jan. 15.

If OPEC decided not to make cuts, "it may be an opportunity lost for those companies to have their chance this year," Vinson & Elkins' Oelman said.

Of the companies that filed to go public in the second half of 2018, the largest by revenue was private equity-backed EnVen Energy Corp. "Historically, the commodities market has been volatile. This market will likely continue to be volatile in the future," the company said in its initial S-1 filing.

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In prior government shutdowns, the SEC was able to review IPO filings. Currently, a small number of SEC personnel are responding only to "emergency situations involving market integrity and investor protection, including law enforcement," according to the regulator's website.

By contrast, in October 2013 when a government shutdown lasted more than two weeks, several IPOs came to market, including Empire State Realty Trust Inc., the owner of the Empire State Building, retailer Burlington Stores Inc. and real estate brokerage RE/MAX Holdings Inc., said Ethridge, who ran the IPO business for the New York Stock Exchange at the time.

Large tech unicorns — such as ride-hailing companies Uber Technologies Inc. and Lyft Inc., which are both reportedly eyeing IPOs this year — are expected to still be able to head to market.

"I'm more interested in the company that's going out with sub-$1 billion [in valuation]," Ethridge said. "Most of the IPO market resides there — most years it's 70% to 80% of the market."

Investor appetite also is a key consideration. If market turmoil continues to be an immediate threat, the price performance of IPOs could take a meaningful hit. That, in turn, could dampen investor interest in IPOs.

"The demand side is important because these stocks might not be a 'must own,'" Ethridge said.