April 4, 2017
By Derek Thomson, Capital Markets Research Leader, PwC
The first quarter of 2017 saw 27 US IPOs raise $11.8 billion, which is the second slowest quarter in the past six years in terms of activity. The slow start to the year was slightly surprising given the positive macro-environment – record closes in the broader equities markets, upward revisions in GDP, continuing strong job growth, minimal equities volatility despite US political uncertainty, and two votes of confidence from the Federal Reserve as evidenced by the two recent increases in the Fed funds rate, all combined to produce a supportive environment for IPOs in Q1 2017.
Well-known brands from a diverse range of industries
Although light in terms of volume, the quality of IPOs in the first quarter of 2017 was high, with brand names and larger market capitalizations leading to a 74% increase in the average deal size over Q1 2016. The IPOs came from a diverse range of industries, led by special purpose acquisition companies (including the largest SPAC IPO in 10 years), and technology companies, with the notable exception being a significant slowdown in biotechnology companies, who have in previous quarters driven IPO activity. Technology IPOs also led proceeds raised, including the fourth largest IPO in five years. The oil & gas sector maintained the momentum it built in the second half of 2016 in an increasing oil price environment, with another three deals this quarter. Both of these sectors are seen as bellwethers for the wider IPO market and are being closely monitored by investors.
IPO returns continue to outperform a very strong Q1 2017 equities market
For the fourth year out of the past five years, IPO returns outpaced the equities market indices, providing a home for investors seeking returns. The average return for Q1 2017 IPOs stands at a healthy 12%, more than double the well-performing S&P 500 return of 6%. This follows on from a strong 2016 crop of IPOs which produced average returns of 23%, again more than double the return of the broader markets S&P 500 return of 10%.
Growing participation of financial-sponsor backed deals
More than half of Q1 2017 IPOs were financial sponsor backed, which are led by private equity investment firms that bring their extensive capital markets expertise to bear on the public offering process, and is a significant increase over 2016. The portfolio companies seek to raise capital to grow or to repay debt, and IPOs also create a liquidity platform for the financial sponsor’s eventual exit.
Follow on activity climbed in Q1 2017
The US follow-on market has recovered from the slowdown in 2016, with 211 FOs raising $38.8 billion as investors re-expressed their confidence in proven companies and liquidity. The pharma & life sciences sector led the way in terms of volume, while the oil and gas and REIT sectors raised nearly half of the Q1 proceeds.
Refinancing drives the high-yield debt market
Actual and expected interest rate increases have largely driven the high-yield debt market over the past few years, and Q1 2017 was no exception with 143 issuances raising $81.7 billion, marking the best quarter since Q2 2015. Speculation on interest rate increases may continue to be a factor in issuance levels in the coming months as the Fed has stated its intention to raise interest rates 2-3 times in 2017.
The road ahead
While we are definitely seeing heartening evidence of recovery, the IPO market is still trying to catch up to previous performance. Looking forward, investors are closely watching what’s happening in Washington to factor tax policy, regulation changes and infrastructure programs into their investment decisions. But so far, we’re happy to report that 2017 is off to a steady start, with strong indicators pointing to continued recovery and growth.
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