The sound I heard at the end of 1998 was a grinding halt," says Jeffery Adduci, president of the Regional Investment Bankers Association. Announcing what is probably bad but predictable news for entrepreneurs, Adduci is referring to the market for initial public offerings (IPOs).
Investment bankers that handle IPOs were primarily spooked by two events, according to Adduci. The first was the volatility in the stock markets. "Investment bankers can't underwrite IPOs in an environment where the market may drop 200 points the day before or the day after they come out," Adduci says.
What's worse, the prognosis for the market is questionable at best. "We're not economists," says Adduci, "but nonetheless, the economic slowdown in Asia, as well as the near collapse of the Russian economy, all complemented by hedge funds that could lose trillions, would lead prudent investors to conclude that there's a chance the markets will [continue to] seriously decline." With odds like that, investors, as well as the investment bankers who serve them, are reluctant to place their bets on new companies via IPOs.
The numbers tell the story. According to Securities Data Co., the IPO tally for the first eight months of 1998 was just 340 deals--a number that on an annualized basis is way off from the 1997 and 1996 tallies of 636 and 874, respectively. And what the numbers don't show is that the market's 1,500-point slide from mid-July to the end of August 1998 virtually turned off the IPO spigot altogether, with just four IPOs squeaking out in September.
Adduci's remarks about IPOs are all the more painful because his trade organization's membership consists of the boutique brokerage firms that underwrite initial public offerings of $5 million to $15 million--a size that is generally too small for national and regional firms but which constitutes a vital resource for many small and growing companies.
David R. Evanson's newest book about raising capital is called Where to Go When the Bank Says No: Alternatives for Financing Your Business (Bloomberg Press). Call (800) 233-4830 for ordering information. Art Beroff, a principal of Beroff Associates in Howard Beach, New York, helps companies raise capital and go public.