U.S. President-elect Donald Trump: a help for IPOs? To the many industries that might benefit from a Trump presidency, you can add IPOs.
It's worth exploring, particularly since the IPO market has been moribund this year and Snapchat and German hotel firm Trivago filed for an IPO this week.
And next Tuesday, the NYSE will play host to what might be the most unusual IPO of the year: Innovative Industrial Properties, a Real Estate Investment Trust (REIT) REIT that owns and manages cannabis facilities.
Hey, somebody's got to own the pot farms.
Back to Trump and IPOs. Here's the thinking:
1) The market rally is a big help. Market conditions are the number one determinant for IPO activity. With major indices at new highs, individual stocks breaking out, and trading volumes more than 50 percent above normal, conditions are ideal, for the moment.
"With the markets moving, if you are in a private market you are not participating in the gains," Kathleen Smith, co-founder of Renaissance Capital, which provides research on IPOs and runs the Renaissance Capital IPO ETF (IPO). "There is tons of money that has been invested in companies to keep them private and avoid the vagaries of the public market. Now that the market is starting to move, they may be shamed into getting into the S&P 500."
2) A reset in valuations? Deregulation and lower taxes, if enacted, are a strong argument in favor of higher valuations, not just for existing stocks but for potential IPOs. Remember, a major reason many companies have stayed private is that they fear their valuations will be reduced should they go public.
Any deregulation is a positive, especially for small companies. Heavy regulations hurt small companies the most.
Lower tax rates could also be a major plus. Most IPOs tend to be small and midcap companies that pay the full marginal rates, so any reduction (Trump has proposed lowering corporate tax rates from 35 percent to 15 percent) will have a big impact on them.
3) Higher interest rates tough for private funding? Higher rates are a potentially double-edged sword. Generally, higher rates tend to hurt smaller companies. Also, when company's value is based on future cash flow, it will be less valuable today. So it will hurt companies valued on future cash flow.
But there's a counter argument that could be made. Higher rates will make it more difficult for private companies (venture capital) to borrow money and invest in startups. Cheap, easy money is one of the main reasons that so many companies have elected to stay private. To the extent the cheap money goes away, it removes a major source of funding and may force companies to go public.
All this sounds positive, but let's see if the IPO calendar expands. Right now the calendar is very light.
And there's still plenty of things that could go wrong. Naeem Aslam, chief market analyst at ThinkMarkets, a European brokerage firm, told me that IPOs would likely suffer should a trade war break out.
"U.S.-centric IPOs may still come out, but international investors will not have any interest in U.S. IPOs should a trade war emerge, particularly between the U.S. and China," Aslam told me.
Which brings us back to a very U.S.-centric deal: pot and Innovative Industrial Properties. How big a deal is it that California and Massachusetts legalized pot? A very big deal. Other smaller publicly traded cannabis companies have all been flying since the election.
This company is the first cannabis company listing on the NYSE.
The people behind the company are respected people in the REIT business. Chairman Alan Gold was CEO of BioMed Realty Trust, which has a long track record of providing office and research space to the healthcare community (Blackstone acquired it for $8 billion in October 2015).
Remember something: banks aren't allowed to lend due to federal rules against marijuana. This is a way for pot companies to raise capital.
Talk about going public at the right time!