U.S. Initial Public Offerings (IPOs) were a major disappointment in 2015. According to Renaissance Capital, 170 IPOs raised only $30 billion (275 in 2014), which is the lowest since 2009. Median deal-size also decreased to $93.8 million from $100 million in 2014 owing to a higher number of small biotech offerings.

Almost half of the IPO proceeds came from the Health Care sector (46% from 78 deals), followed by Energy (7% from 12), Financials (14% from 23) and Technology (14% from 24). The number of technology IPOs fell drastically to 24 in 2015 from 55 in 2014, marking the maximum deterioration since 2009.

No Alibaba to Rescue

Lack of a big-sized deal like Alibaba’s (BABA - Analyst Report) in 2014 was also one of the reasons behind the decline. The ten largest U.S. IPOs raised $9.9 billion in 2015, the lowest since 2005. These companies witnessed an average first-day increase of 16% in their share prices. However, a massive decline in share prices in the energy sector (12 IPOs) dragged down the average return to -12%.

The year’s largest deal, IPO of payment processor First Data (FDC - Snapshot Report), met lackluster response despite the price cut to $16 (from the original expectation of $18–$20). The company finally managed to raise $2.56 billion from the IPO. As of Dec 31, 2015, First Data’s return from the IPO was a minimal 0.1%.

Meanwhile, health care company Aclaris Therapeutics (ACRS - Snapshot Report) was the best performing U.S. IPO with a return of 144.9% as of Dec 31, 2015. Ad-tech provider MaxPoint Interactive (MXPT - Snapshot Report) was the year’s worst, with returns declining to 87.2% as of the same date.

IPOs of well-known technology companies like Square, Box, GoDaddy, Etsy failed to gain market traction. On the other hand, well-known brands like Shake Shack, Ferrari, Fitbit (FIT - Analyst Report) and Blue Buffalo received mixed response from investors.

Will Meagre Returns Drive Away PEs and VCs?

Disappointing IPO returns is a major concern. According to Renaissance’s report “At the end of 2015, 57% of IPOs traded below the offer price, compared to 41% at the end of 2014. The average IPO finished the year down -2% from its offer price, below most major indices and negative for the first time since 2011, ending a three-year bull run of 20-40% average returns for IPOs.”

Further, the decline in private equity (PE) backed IPOs, down from 71 in 2014 to 39 in 2015, sums up the mood of the market. PE-backed proceeds totaled $11.3 billion, significantly below $25 billion recorded in 2014.

Although venture capital (VC) backed IPOs (85 in 2015 versus 126 in 2014) formed the major chunk of the 2015 IPO market, overall proceeds declined 75% from the 2014 level.

2016 IPOs – Few to Resurrect Market

The future of IPOs is as disheartening as it was last year. Continuing volatility in crude oil prices and the prolonged slump in China’s economy are playing spoilsport. Further, Fed’s strategy over raising rates and the upcoming presidential election are expected to keep investors on tenterhooks.

Nevertheless, we believe 2016 holds considerable promise for the U.S. IPO market buoyed by continuing economic growth and improving consumer spending.

According to International Monetary Fund (IMF), the U.S. is forecasted to grow faster (2.8% in terms of GDP) than other developed nations like Spain (2.5%) and Great Britain (2.2%). That fact is surely encouraging for investors.

We believe healthcare will continue to lead the IPO market in 2016. Already 6 healthcare companies have filed for IPOs in the first seven days of 2016. However, sectors like financials, technology and consumer discretionary present significant growth opportunity in 2016.

Highly anticipated filings from the likes of Uber, Airbnb, Xiaomi, Snapchat, Cloudera, Huddle, McGraw-Hill Education, Univision and Dropbox are expected to drive IPO momentum in 2016.

Zacks Rank

Currently, Alibaba has a Zacks Rank #2 (Buy) with First Data, Aclaris Therapeutics and MaxPoint Interactive carrying a Zacks Rank #3 (Hold). Meanwhile, Fitbit carries a Zacks Rank #4 (Sell).