Wounded unicorns—IPO pipeline slows

Published Thu, Apr 2 20157:31 AM EDTUpdated Thu, Apr 2 20158:30 AM EDT

After a record year in 2014, the IPO market hit a roadblock last quarter, a worrisome sign that could stall the bull market. The number of companies going public in the past three months fell to 34, a 50 percent decline from the same period a year ago, making the quarter the least active for new offerings since 2013, according to Renaissance Capital. Proceeds from new deals were also slashed in half to $5.4 billion. The dramatic slowdown has some market watchers concerned. IPOs are seen as barometer for the health of the economy and the stock market. This is because most new public companies trade on expectations of future earnings growth, but when investors feel valuations are overextended or there are bigger doubts about the macro outlook, the transactions are delayed. So while the S & P 500 trades at an all-time high, IPO activity tells a different story. The broad decline in IPOs this year took place across most sectors, with tech and energy industries seeing the biggest drops, and health care accounting for most of the deals. Read More Earnings outlook grows bleak. What to buy Valuations are also in sight, with more than a third of new offerings pricing below the range, and many other postponing, according to Renaissance Capital. And although the average IPO return came in at 15 percent, it was the weakest level in about three years, pointing further to diminishing demand in the sector. In the coming months, the trend for the group shows less capital in sight. Renaissance Capital writes: "Only 47 companies submitted initial filings in the 1Q 2015, down from 98 in the 1Q 2014. The total IPO pipeline now contains 122 IPOs looking to raise $22 billion, about the same number of deals as one year ago but 33% lower in terms of proceeds." As high-profile brands like Box , GoDaddy and Shake Shack venture into the market and steal the limelight, should investors chase the carrot? The Money Play: CNBC Pro ran a screen of the best performing IPOs in 2015. Spark Therapeutics , a biotech company, tops the list, up over 200 percent from its debut in January. Second in line is the restaurant-chain Shake Shack, whose shares more than doubled since going public earlier this year. The idea is that if the market turns south, some of the high fliers will get hit as investors rotate to more stable names. A less risky way than investing in individual IPOs is through the Renaissance Capital ETF (ticker IPO). The fund tracks about 60 of the newly minted IPOs and removes them after two years, once they have become seasoned stocks. Twitter , Alibaba , JD.com and Hilton Worldwide are some of the holdings. So far this year, the ETF outperformed the market, up 6 percent, versus 0.1 percent for the SPY exchange traded fund tracking the S & P 500 ticker. — CNBC's Gina Francolla contributed to this story.

A Shake Shack restaurant in New York.

Andrew Kelly | Reuters

After a record year in 2014, the IPO market hit a roadblock last quarter, a worrisome sign that could stall the bull market.

The number of companies going public in the past three months fell to 34, a 50 percent decline from the same period a year ago, making the quarter the least active for new offerings since 2013, according to Renaissance Capital. Proceeds from new deals were also slashed in half to $5.4 billion.