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Headwinds blowing, but IPO window not shut, observers say


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Headwinds blowing, but IPO window not shut, observers say

The IPO market is dealing with a setback, but the window to go public is still open, industry experts said.

Blue Apron Holdings Inc. and Snap Inc. executed two of 2017's most high-profile IPOs, and both reported disappointing quarterly results on Aug. 10. Each saw their stock prices drop more than 10% after Snap reported fewer users than expected and Blue Apron reported larger losses than expected.

Many companies in the IPO pipeline are currently on the sidelines waiting for the summer vacation season to end before moving forward with offerings. The results from Blue Apron and Snap send a negative signal to those that are watching the IPO market, said Alex Castelli, co-leader of the national liquidity and capital formation advisory group at the firm CohnReznick LLP.

"That's not what you want to see," he said in an interview.

But Castelli does expect IPO activity will resume in 2017, and he noted interest in the deals has been growing. The U.S. IPO market is on pace to end what had been a two-year decline in activity.

The number of U.S. IPOs has increased 54% year over year to 91, and the total proceeds raised has increased 135.8% year over year to $22.2 billion, according to data as of Aug. 11 from Renaissance Capital LLC. However, the current rate would fall far short of levels reached in 2014, which saw $87.8 billion raised from 275 IPOs, according to Renaissance.

Greater IPO activity can help improve the performance of the equity capital markets business for investment banks. But so far the improvement has been gradual, and Castelli isn't expecting to see significant growth in the IPO market until 2018.

"Recovery takes time," he said.

One challenge to the IPO market is the availability of capital for those that are private. Private equity funds worldwide are on pace to set a fundraising record for the second straight year.

"[Private] companies have access to capital," Castelli said. "They don't need to go into the public markets to get that money."

Potential issuers in similar sectors as Blue Apron and Snap could find that they have less reason to go public. The latest earnings results from the two will put pressure on valuations of peers that decide to go public, said Josef Schuster, founder of IPOX Schuster LLC, which offers index products that track IPOs and spinoffs.

But Schuster doubted the results from Blue Apron and Snap will have much negative impact on issuers from other sectors. He said the results are company specific and not an indication on the health of the IPO market. Schuster expects IPO activity overall will increase in September.

"Deals are going to come," Schuster said in an interview. "I don't think the window is shut."