After a four month hiatus for US Tech IPOs, the listing of digital security provider SecureWorks (SCWS) on April 20th was the deal to watch closely as everyone prayed for the canary in the coal mine to sing again.
It has been a rough time for technology initial public offerings, as there were just 22 tech IPOs listed over the past 12 months, which puts this sector way behind health care’s 70 deals during the same period. Actually, it’s become so bad that some experts expect the value of public tech companies going private again could top the value of tech IPOs this year.
There was noticeable excitement around SecureWorks during its road show. At first, everybody seemed to like this company spun out from the computer maker Dell, with the aura of Michael Dell strongly influencing the romance. The initial range was set at $15.50-$17.50, and some ratings showed confidence in an opening pop.
Then people started to look closer into the prospectus to find a boring company located in Georgia bearing an unsexy name and generating losses for 17 years, and whose founders were long gone. Moreover, the cyber security sector finds itself cooled off compared to a year ago, with the value of competitors like FireEye dropping steeply since its IPO.
All of a sudden, this deal became a tough sell, and according to insiders, its underwriters themselves were only giving a 60-40 chance for success.
Eventually the deal priced below the range at $14 and sold 8 million shares, significantly fewer than the 9 million it had originally targeted. It opened below the price at $13.98, even reaching $13.40 before later coming back above its introduction price. At that time we decided to offload our allocation, feeling fortunate for having made a +3.57% profit. The stock closed its first full day completely flat.
There was optimism among tech firms that a robust SecureWorks opening would pave the way for other offerings, but now few analysts see much hope for other technology companies seeking to tap the public markets.
But was this deal really the clear bellwether that the tech IPO market as a whole was waiting for? After all, SecureWorks was not a typical Silicon Valley start up carrying a disruptive product or service, or even better, a profit making tech company like Atlassian (TEAM), the last tech IPO of 2015 that popped +31% at opening last December.
To recover and get back to 2014 levels, the overall IPO market has to be turned on again by technology IPOs. For that to happen, it needs great stories with growth and profits. Some of the Unicorns clearly fit the job description; let’s hope they are now ready to jump in and join the party.
In April, we participated in a total of 7 IPOs, which brought mixed results. Bats Global Market (BATS), a securities exchange gave us the best return of the month with +21.05%, followed by biotech American Renal Associates (ARA) with a +19.32% profit. A REIT, MGM Properties Growth (MGP), brought us a decent +6.19%, while the Chinese brokerage firm Yintech (YIN) got us a tepid +2.2%.
More disappointing were the results of Telepizza (TPZ), as it listed in Madrid only to get us our third worst loss since the inception of the fund: – 9.68%. And the return of Red Rock Resort (RRR), after pulling back an earlier IPO attempt in January, also paced in negative territory with -2.56%.
Despite those setbacks, the Year-to-Date total return on investment for our Fund increased and is now at +9.87%.