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U.S. Government Shutdown Could Wreak Havoc on the IPO Market
With the partial shutdown of the U.S. government now closing in on a month, hundreds of thousands of federal employees are going unpaid, while its damage to the American economy is now proving to be worse than the Trump administration had previously forecast.
And now the longest government shutdown in U.S. history may also inflict even further pain: There are growing concerns that the market for initial public offerings – which was expected to have a big year in 2019 – could be a victim of the impasse in D.C. The biggest roadblock for companies pursuing an IPO this year is the partial closure of the Securities and Exchange Commission, creating a rare scenario in which no companies debut on the market in January, as the Wall Street Journal reports.
It now looks likely that no major company will tap the U.S. IPO market this month. Since 1995, there have been just three years that had a new-issue drought in January, according to Dealogic data. That happened as a result of choppy markets in 2003, 2009 and 2016, which went on to be some of the weakest years for initial public offerings on record, the data show.
As part of the shutdown, currently the second-longest on record, the SEC has furloughed thousands of employees and stopped reviewing and approving all new and pending corporate registration statements, including proposed IPO filings, according to the agency’s shutdown plan and other notices on its website. Dozens of SEC accountants and lawyers who review IPO paperwork are prohibited from reading email or calling deal lawyers seeking to discuss complex disclosure questions.
Although the government also experienced shutdowns in 1995, 1996 and 2013, the SEC “was able to draw on surplus cash to remain open while other government offices closed,” the Journal notes. This has not been the case this time around.
Some of the biggest names in tech are planning IPOs this year – including Uber, Lyft and Pinterest – which has lead to significant hype about the market. There doesn’t appear to be any serious threat to their plans even if their offerings are delayed, but for biotech companies, “many of which tap public markets earlier to raise cash for drug development,” the shutdown could prove especially problematic, according to the Journal.
While the Journal also points out how the government shutdown has temporarily derailed the plans of companies – such as plant-based burger startup Beyond Meat – that had delayed their IPOs to early this year because of the market turmoil in 2018, this current delay could actually work in their favor, as MarketWatch reports.
Still, Renaissance Capital’s Smith said the forced delay may help some companies, given weakness in the stock market at the end of 2018 and into the early days 2019. That weakness has likely reduced investor risk appetite and may force new IPOs to be priced at a discount.
“It may be a blessing in disguise that companies cannot get IPOs done during this time,” she said. “As the stock market repairs itself over the next several months, the issuance environment will be much better in the spring than now.”
Meanwhile, bankers who spoke to Business Insider at the end of last year, were predicting “about 50 IPOs this year, and many said they expect the deal value to be around 2018’s total of $19.8 billion.” But as the government shutdown is also causing renewed market volatility, there are questions about how big some of these IPOs will end up being once they are launched.
Per Business Insider:
And while volatility remains a factor, some believe the shutdown is taking time out of a precious window of opportunity when investors are eager to see new assets on the public markets.
“There’s a perception right now that the market is open and that there would be demand for IPOs,” said Kenton King, a partner at Skadden, Arps, Slate, Meagher & Flom. “That’s not always the case, and the IPO market is notoriously volatile, even in the best of times. When there’s demand for new issuances, you want to get out and you want to get it done.”
And, of course, “the paperwork pipeline will likely be backed up” once the government does reopen, as Business Insider reports. This could further delay companies from filing.
The bottom line: There are likely a lot of angry bankers right now who aren’t getting paid as long as the government remains closed.
Photo: Getty iStock