M FoundationThematics | EuropeVenture Vision: IPOs #3 - First Day PopsMorgan Stanley & Co. International plc+Edward StanleyEquity Strategist Edward.Stanley@morganstanley.com +44 20 7425-0840 Matias OvrumEquity Strategist Matias.Ovrum@morganstanley.com +44 20 7425-9902 Our Venture Vision weeklies look at (1) early-stage cross-theme funding patterns; (2) relative valuations between themes; (3) public versus private valuations; (4) the resulting anomalies within certain themes. Please let us know if you would like our excel database of >45,000 VC deals categorised by theme, country, value and date. We also send this file as a weekly distribution if you would like to receive it regularly. See here for our global market synopsis. See here for our longer analysis on the state of the VC market, particularly as it relates to non-US Venture and innovation acceleration. 1st day returns have become emblematic of "successful" IPOs. Yet, over a 3 year view, such pops tends to be uncorrelated with a company's success in listed markets. That said, it is a more useful tool than most in providing the catalyst for a snowball effect in restarting IPO markets after a trough. • Sign up here for Private Markets Expert Call on the state of private markets, funding and exits• See #1 (here) and #2 (here) in this IPO series for further market contextExhibit 1:Question of the Week - How have IPO returns developed? Consensus view:Strong day 1 returns = "Good" IPOOur Take For Investors:Our Take For Corporates: From our research there is a clear difference between Trading IPOs that perform well 1st day and Holding IPOs who are better performers longer term. Given the nature of peak markets - the two are usually opposite.Valuations and 1st day returns are strongly correlated , meaning that the best funding environments coincide with the highest short term returns. In other words, strong 1 day returns is the largest driver of an IPO snowball effect .Source: Morgan Stanley Research First day returns are a leading indicators of IPO volumes: Looking at our IPO data back to the 1990s, using lagged 1st day returns shows a positive relationship between previous 1st day returns and subsequent IPO listings/proceeds both 6 months and 12 months thereafter. We note, however, this relationship has become somewhat more volatile since the 2008 IPO regime shift we have discussed in prior research. The change in the correlation below appears to be attributable to faster listings subsequent to changes in first day return performances. The market appears to be becoming more reactive (i.e. the time lag between rising first day pops and a rise in volume of activity is compressing).Exhibit 2:Rolling Averages of 1st Day Returns Leads Number of Deals-100%100%300%% Change in 12mo Avg First Day Returns% Change in 12mo Avg # of DealsRegime shift; Correlation weakens or InvertsSou...
