Something has to give.

A stock market that has rallied sharply to ludicrous valuations is normally accompanied by a booming IPO market. They’re like twins. The S&P 500 jumped 13.5% in seven weeks – to bring it back up to flat year-to-date, a lofty perch, though down a smidgen from its all-time high in May 2015. But year-to-date, the IPO market is in the worst shape since 2009.

Something has to give.

“Either the IPO market is going to pick up, or the stock market is going to pull back, but it’s hard to envision both conditions peacefully coexisting,” Jack Ablin, chief investment officer at BMO Private Bank told the Wall Street Journal.

In the US, only 8 IPOs made it through the window in the first quarter, according to Renaissance Capital’s Quarterly IPO Review, dated March 31. They were all early-stage medical device or biotech companies. Two from China. Not a single one has a product or revenues.

Also three blank-check companies made it out the gate, with the idea of buying up assets as they become available, but Renaissance Capital did not include them in the above tally. The Wall Street Journal pegged the total number of IPOs at 9, including the three blank check companies but excluding the two China-based outfits, which are already publicly traded elsewhere.

This was the lowest number of IPOs since 2009. And the total amount raised – $1.2 billion for all of them – was the smallest in 20 years. Another 9 IPOs got postponed at the last minute, and one was withdrawn altogether. No Tech IPOs at all.

It was the first quarter without any private-equity backed IPOs since Q1 2009. PE firms had loaded up on LBOs before the financial crisis. After years of booming stocks, they thought it would be a good time to unload. Some did in 2014 and 2015. Most of those struggled. And this year? Renaissance Capital:

The last LBO to go public was KKR’s payment processor First Data in October 2015; since then, it has vastly underperformed its peers. A spate of large PE-backed IPOs have waited in the pipeline since the 2H15, including Albertsons, Neiman Marcus, Univision and Laureate Education.

Another big-name LBO queen waiting in the wings is US Foods Holding Corp. But for now, PE firms seem to be stuck with their LBOs.

During the quarter, when the S&P 500 index was about flat, the Renaissance Capital IPO index fell 7%. Not exactly an enticing environment.

One of the problems pre-IPO companies face is their mega-inflated “valuation,” the infamous “unicorn” syndrome where startups have to be valued at $1 billion or more, by hook or crook, to where even SEC Chair Mary Jo White made it a point yesterday to come out to Silicon Valley herself and warn power brokers and money gurus about “fraud” in these valuations that not only hits employees and others that end up with these shares directly or indirectly, but also filters through institutions to retail investors.

“The concern is whether the prestige associated with reaching a sky high valuation fast drives companies to try to appear more valuable than they actually are,” she said at one point. No kidding. The SEC is watching out for us – after the damage has already been done.

So to get out the IPO window, some companies had to discount the “valuation” they had as a private company. Square, which had a valuation of $6 billion as a private company, went public at half that last year. Despite doubling since its low in February, including a curious spike over the last few days (what is Wall Street trying to accomplish?), it’s still $1 billion short of its valuation as a private company.

And that kind of valuation markdown – 50% in some cases – is a scary thought for current investors and employees who might see that perceived wealth disappear entirely if they came late to the game.

There are now 42 companies in the IPO pipeline with new or updated filings since January, according to Renaissance Capital, including a gaggle of private-equity backed LBOs and 11 revenue-less biotechs similar to the ones that just wobbled through the gate. But so far it doesn’t look very good for them in the second quarter either.

“It’s kind of unprecedented for the general stock market to be so close to record highs and yet so little IPO activity,” Jay Ritter, professor of finance at the University of Florida, told the Wall Street Journal.

Now everyone is waiting for the icebreaker, that one big company with real revenues and preferably even earnings to pull off a successful IPO. Then everyone else can follow. That’s the meme. So who dares to be next?

On a global basis, the IPO picture was dreary too. Only 167 IPOs made it out the gate, the lowest since 2009, the Financial Times reported. Even worse: 17 IPOs were “scrapped” at the last minute, or 10% of the total, an unheard-of proportion. As in the US, stock market “volatility” got blamed.

But the past seven weeks, markets have been soaring and volatility as measured by the Volatility Index (VIX) has settled back down to historically low levels, and still the IPO drought persists.

So could it be something else?

Turns out, investors don’t seem to believe in the rally. They fear that the rally was the product of a majestic short-covering panic, a classic bear-market rally that traders rode up as far as they could – that it wasn’t in fact the beginning of a new bull market. But a bull market is precisely what it would take to dump these overvalued IPOs on a blindly exuberant public. And the IPO gurus, with all their insights and perspective, don’t seem to see that bull market.

They have their reasons. Not all is rosy. Business revenues and earnings are down, productivity is down. And now layoffs are reaching far beyond energy. Read… Job Cuts Pile up









Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.