Orange County companies matched their first-quarter initial public offering performance when Irvine-based bioprosthetics maker Hancock Jaffe Laboratories Inc. went public in May, netting a modest $8.6 million. It’s since lost about a third of its value.
According to Ernst & Young’s Global IPO report, of the 25 companies in the West Region that went public this year, only two were headquartered locally. Drug developer Evolus netted about $60 million in February. The Irvine-based Botox threat has been a winner for investors so far, more than doubling its market value to $670 million as shares have popped from $12 to $28 and change.
“Well the IPO we have seen first half has seen some good returns,” said Tim Rahall, assurance partner and technology specialist with Big Four accounting firm Ernst & Young’s Irvine office.
OC companies contributing two of the 25 West Region IPOs amounts to 8%, itself not a bad number. But the two netted just $70 million in proceeds and 1.2% of the $6 billion the other 23 IPOs in neighboring states raised for their early investors and to fuel growth. They included some high-profile technology companies, such as San Francisco-based software developers DocuSign Inc. ($724 million) and Drobox Inc. ($869 million).
There are clear positives to hosting high-profile public companies, especially new ones. “Draws attention to your talent pool and support for the ecosystem, said one longtime investment adviser. For one, it’s easier to compensate with stock options, and that draws the talent.”
Ask Brian Niccol, chief executive of Chipotle Mexican Grill Inc., who’ll return to Orange County this summer with his new employer in tow, having been lured from Taco Bell with an options-laden compensation package.
But the paltry first-half IPO numbers here shouldn’t be taken as an indictment of the local economy or even of its growth-stage segment.
“It’s one pillar, Rahall said. “But so is job growth, successful exits, amount of funding and startups, accelerator groups, all of that shows.”
In the first half of 2017, the local IPO market was one strong pillar. They seemed to arrive like trains, one after the other.
February of last year brought the public coming out of Tustin-based Foundation Building Materials, netting proceeds of $206 million; March debuted software developer Alteryx, which raised $145 million selling less than 20% of itself for just shy of an $800 million market cap. It’s tripled since while continuing to grow annual sales over 50% and adding international markets; April netted $303 million for San Juan Capistrano-based trade-show operator Emerald Expositions; and May’s IPO by Aliso Viejo-developer Five Point Holdings attracted $338 million.
That’s a billion in funding for four companies, much of the capital raised to facilitate growth in every form.
Public Passe?
To be sure, U.S. public markets have been in a generation-long decline. At least in number. U.S. listed stocks peaked in 1996 at the dawn of the internet and dot-com era, topping out at 7,322 companies on the major markets.
This year, the Wilshire 5000 Total Market Index, consisting of all actively traded U.S. stocks, started with fewer than 3,500 components. Several months back in the office of veteran Newport Beach investment banker Byron Roth, the financier ticked off a few of the reasons growing companies have grown shy of public markets. They include costly and imposing compliance rules led by 2002’s Sarbanes-Oxley Act and forever-prevalent class-action lawsuits against public companies.
Rahall, like Roth, points to the growth of options to raise capital.
“There’s plenty of funding for private companies from private equity, venture capitalists,” he said. “It’s just incredible the number of these private funders. The number of VCs has tripled, and their investors have grown.”
There are also the venture-capital units of large public companies, Google Ventures for one. It’s all that private funding that’s taken the place of the public markets.
One local example of plentiful private funding is Irvine-based Cylance Inc. The cybersecurity firm just completed a $120 million Series E round led by giant asset manager Blackstone Group L.P. It’s raised nearly $300 million and zoomed past $130 million in sales this year.
Rahall says companies like Cylance and the Palmer Luckey-co-founded Oculus VR show young companies can grow in Orange County, private or public.
“The talent is here. We see some of these companies from the Bay Area coming down and looking to pick up talent.”
The EY partner has worked on a number of local public offerings and remains a believer in the public option.
“Our data shows that IPOs give a better valuation … I still think the IPO route is preferable.”
And he predicts a second-half pickup.
“There are great companies that are in the pipeline, in the software space, almost anything digital, cybersecurity … a lot of these companies are dual-tracking the exit strategy.”
