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Analysis: Prolonged government shutdown could delay IPOs, worsen backlog for SEC

If the partial government shutdown persists for several more weeks, it could delay a number of high profile IPOs, ranging from Uber Technologies Inc. to biotech firms, and exacerbate an already sizeable backlog of at least 44 public offers awaiting the green light from the Securities and Exchange Commission.

Government agencies have been partially shuttered since Dec. 22, 2018, including the Securities and Exchange Commission responsible for vetting and approving IPO applications as well as providing feedback on filings. The agency has furloughed all but approximately 6% of employees, according to its website, and is only responding to emergency situations. If the shutdown drags on for several more weeks, it could complicate the timing for companies planning to go public this year, experts said.

According to market data provider Dealogic, as of Jan. 8, there is a backlog of 44 IPOs that need to be reviewed by the SEC before those companies can begin trading publicly. And because most IPOs are now filed confidentially in the U.S., "The number of IPOs in the pipeline is likely to be much higher," Dealogic Americas Media Manager Ed Jones said in an interview.

Kathleen Smith, principal of the global IPO investment advisory firm Renaissance Capital, voiced concern about the backlog. "Issuers need [SEC] feedback and approval to move their registration statements forward ahead of an IPO launch," she explained "A backlog is building that will delay the IPO process for companies of all sizes including the large tech deals."

Smith said that January and early February are always slow periods for IPOs but "if the government shut down persists, it will gum up the IPO process."

Santosh Rao, head of research at Manhattan Venture Partners, agreed, noting that while IPO timelines may have been "pushed out a couple of weeks" at the margins, "overall at this point, it doesn't seem like it's a major problem."

If the shutdown goes beyond February or March, however, there will be a huge backlog, Rao said.

"I would say four to eight weeks is significant in terms of delaying the whole process," the head of research said. "But three to four weeks is fine. I'm sure it delays a little but not that much."

Among the companies reportedly expecting to enter the market in 2019 are seven highly valued technology-related companies: ride-sharing firms Uber and Lyft Inc.; the online short-term rental platform Airbnb Inc.; data-mining firm Palantir Technologies Inc.; the social media app Pinterest Inc.; the workplace messaging app Slack Technologies Inc.; and the software firm CloudFlare Inc. The research organization CB Insights noted in its 2019 Tech IPO Pipeline report that if Uber, Airbnb, Pinterest and Slack "go public at their rumored IPO valuations, they would all rank among the 10 largest venture-backed tech IPOs since 2012." The group cited a $120.0 billion valuation for Uber, a $31.0 billion valuation for Airbnb, a $15.0 billion valuation for Pinterest and a $10.0 billion valuation for Slack.

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Slack and Uber representatives declined to comment on the shutdown's impact, while the other companies did not respond to requests for comment.

In terms of timing, both Uber and Lyft filed confidential draft registration statements with the SEC in December 2018. Reports have indicated the two firms both plan to IPO in early 2019, but Uber CEO Dara Khosrowshahi previously said he expects the IPO in the second half of 2019.

Airbnb CEO Brian Chesky said in May 2018 that his company would be ready to IPO sometime this year. As for the other companies, reports from The Wall Street Journal and Reuters have indicated that Slack hopes to IPO in the first quarter of 2019, Pinterest is preparing for an IPO as early as April 2019, Cloudflare is expected to IPO in the first half of 2019 and Palantir is eyeing an IPO sometime in the second half of 2019.

Should the SEC's IPO efforts be delayed, the biotech sector could also be largely impacted. Just ahead of the shutdown, U.S. biotechnology startup Gossamer Bio Inc. filed for an IPO, seeking to sell about $265 million worth of shares. Further, a number of IPOs were scheduled for several smaller companies, including Henry Schein Inc.'s animal care spinoff, clinical-stage biopharmaceutical company Poseida Therapeutics Inc. and Stealth BioTherapeutics Corp, which focuses on therapies for diseases involving mitochondrial dysfunction. The J.P. Morgan Healthcare Conference, one of the largest biotech conferences of the year, is held in the first week of January — a crucial time for companies aiming to generate buzz to make new IPO announcements. So far, only a handful of new IPOs have been announced to kick off the year.

Garrett Nelson, a senior equity analyst at the CFRA financial research firm, said, "assuming a deal is reached soon, there will likely be only a brief delay as the IPO review process typically takes about six weeks on average."

Scott Kessler, director of equity research at CFRA, said the decision to go public is more important than the timing.

"Companies and their bankers realize the market movements are largely unpredictable and can have a major impact on IPO pricing/valuations," Kessler said.

Rao said eight to nine years is typically the right time frame for a company to go public. Uber, Lyft and Airbnb are within that 8-to-10-year mark.

"The end game is to get out to the public market," Rao said, adding that the economy has had the longest-running bull market and one of the best IPO years in 2018. "I don't think these companies want to get caught on the wrong side because the lull after such a run-up might be a little long — longer than expected."