October 3, 2017
By Derek Thomson, PwC Capital Markets Research Leader
After Q2 2017 rang in the strongest quarter for IPOs in the last two years, we saw a significant decrease in IPOs in Q3 2017, with a 42% decline in volume and a 51% decline in value from the previous quarter. These declines come despite record stock market performance and strong economic indicators, albeit in an uncertain geopolitical climate. While these numbers pale in comparison to last quarter, they are still generally in line with prior years’ third quarter periods, which tend to see a summer slowdown.
Pharma and life sciences leads volume for the second quarter in a row
With 35 IPOs raising $6.3 billion, Q3 2017 came in with fewer IPOs than expected after a strong second quarter. Pharma and life sciences led the way accessing the IPO market with 11 IPOs raising $1.1 billion, while special purpose acquisition companies (SPACs) also had another relatively strong quarter with nine IPOs raising $2.2 billion. New issuers continued to get on file with the SEC, although with the SEC’s new rules allowing all IPO candidates to file confidentially, public awareness of the true IPO pipeline is now further obscured. Average time between public filing and pricing was half of Q3 2016 at just over 50 days.
IPO returns continue to outperform
IPOs continued to significantly outperform the broader market indices, with the third quarter’s 35 IPOs generating combined returns of 36% (excluding SPACs), far in excess of the S&P 500’s quarterly return of 4%. On a year-to-date basis, we see similar superior returns from IPOs which produced a 27% return, doubling the S&P 500’s year-to-date returns of 13%. In the third quarter, the media and telecom sector led with a total return of 90%, followed by the chemicals sector returning 73%, the pharma and life sciences sector returning 51% and the technology sector returning 45%. With low market volatility and a relative shortage of issuances in these sectors, it appears as though demand outstripped supply in the third quarter.
Follow-ons lower year-over-year, led by PLS
Following the IPO trend of reduced issuances, the follow-on market also declined, with 157 follow-ons raising $37.9 billion in Q3 2017, down from 190 follow-ons which raised $37.0 billion in Q2 2017, and also down from Q3 2016 which had 169 issuances raise $43.4 billion. Pharma and life sciences led volume of issuances by far this quarter, with 59 follow-ons raising $8.5 billion, followed by the technology and asset and wealth management sectors.
High-yield debt market lower than previous two quarters
The high-yield debt market remained steady in the third quarter with 119 issuances raising $68.5 billion, led by the oil and gas and automotive sectors, which combined raised $20 billion. In line with previous quarters, two-thirds of issuers used proceeds to refinance, while the remainder used proceeds for acquisitions and related activities, stock repurchases, or to pay dividends. Half of the issuers had a BB-, B or BB rating and carried an average yield of 5.6%. High-yield spreads generally tightened over the year, and while the Fed declined to raise rates in their September meeting, they kept their options open for a future increase as inflation reached the target rate, while also indicating the upcoming end of their quantitative easing program.
Although the third quarter for IPOs finished strongly, many expected a more robust third quarter, given the strong results of the previous quarter. However, there are several strong positive economic indicators – stock markets hit record levels, and the US Q2 GDP growth estimate was revised upward to 3.1% this quarter, recording its fastest growth rate in two years. According to S&P, corporate earnings for the second quarter had a strong showing, with 71% of S&P 500 companies reporting better than expected earnings and half of them showing double-digit growth. Additionally, volatility declined to a 23-year low in July. However, with the significant decline in IPO activity this quarter, we’re finding more questions than answers.
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Sources: S&P Capital IQ, S&P LCD, and Dealogic, with PwC sector classification