John Foley, co-founder and chief executive officer of Peloton Interactive Inc., stands for a photograph during the company's initial public offering (IPO) in front of the Nasdaq MarketSite in New York, U.S., on Thursday, Sept. 26, 2019. Peloton fell as much as 9.5% Thursday after raising $1.16 billion in its U.S. initial public offering, becoming the latest unprofitable startup to fail win over investors in its trading debut. Photographer: Michael Nagle/Bloomberg
Peloton chief executive John Foley © Bloomberg

By mid-morning in New York on Thursday traders knew there was a problem. Shares in exercise equipment company Peloton, primed to list on the Nasdaq stock exchange, had not yet started trading.

Investors around the world were looking to the New York-based company’s initial public offering to gauge the health of new listings after the year’s most high-profile deals had disappointed.

Shares in Uber are 30 per cent lower than their May debut. Lyft, its ride-hail rival, has fared worse — its shares have lost 42 per cent since their March listing.

WeWork, a fellow unicorn (start-ups with a value of more than $1bn), failed to canter into the public market. Corporate governance and leadership concerns weakened investor demand for its listing. The company last week shelved plans to list and on Monday chief executive Adam Neumann was pushed out.

By 11am, a crowd awaiting Peloton’s fate began to form around the terminals of the Nasdaq Listing Center overlooking Times Square. Exchange staff stooped over computer screens waiting for adequate investor demand to kick-start trading and vindicate the $29 share price, which was set the previous day at the top of its range.

But when trading began at 11:57am, investors set an early price of $27, down 7 per cent from the IPO price. Investment bankers shot instant messages across financial centres to one another saying “saddle-sore” investors in the seller of exercise bikes were “back-pedalling fast”, according to Neil Campling, an analyst at Mirabaud Securities.

Peloton shares ended the day 11 per cent below the IPO price, wiping $925m from the group’s equity valuation. Investors who bought the 40m shares at the listing price suffered combined paper losses of about $130m.

The poor opening was the third-worst on record among companies valued above $1bn. SmileDirectClub, which listed last month, remains the worst. Shares in the teeth-straightening group opened 11 per cent below its IPO price and today trade more than 40 per cent lower.

The bleak tone continued on Thursday. By early afternoon Endeavor, the parent group of Hollywood’s biggest talent agency, had cut the amount of shares it aimed to float on the New York Stock Exchange on Friday by 30 per cent. Investors indicated they simply were not interested in the stock. By late afternoon the IPO was scrapped.

Why are IPOs faltering?

As investors have looked beyond public markets for returns, trillions of dollars have flowed to private equity and venture capital asset managers, which, in turn, have been pressured to pour money into start-ups which burn through capital to grow.

SoftBank and its Saudi-backed Vision Fund, for example, tipped $9bn into WeWork. SoftBank alone bought $1bn of shares in a private placement that inflated the office-space provider’s valuation to the $47bn level. No other investor purchased a stake in the company at this price.

“We have had a bubble in the tech start-ups that have developed as private companies,” said Susan Schmidt, head of US equities for Aviva Investors. “WeWork brings this to the forefront.”

The losses from the debuts of Uber, Lyft and Peloton also have a lot to do with a lack of restraint among the underwriters bringing them to market, said Phil Orlando, chief equity market strategist for Federated Investors, a Pittsburgh-based fund manager with $502bn in assets.

A group of 21 banks, led by Goldman Sachs and JPMorgan Chase, were onboard for Peloton. Together, they came up with a dizzy price for a company whose annual net losses rose by about 50 per cent over the three years to June, to $246m, after spending on sales and marketing almost quadrupled to $324m.

Goldman and JPMorgan were also the top advisers for WeWork’s IPO, aiming for valuations above the $47bn price tag SoftBank’s last investment put on the company. As the plan to list unravelled, a $15bn valuation was mooted. Even at this level, investors were uninterested.

“The risk today is that companies are coming to market at full value or at a premium,” said Mr Campling of Mirabaud.

Mr Orlando stressed that bankers should have a role in curbing the enthusiasm of the listing executives they serve. Peloton chief executive John Foley bubbled over in the offering prospectus, writing that the company’s “mission” was to “to better ourselves, inspire each other, and unite the world through fitness”. Investors might have been reminded of WeWork’s pledge to “elevate the world’s consciousness” in its IPO filing.

Mr Orlando said: “As the investment banker you have to slap their hands and say, ‘No, you’re being greedy.’”

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