July 9, 2018
By Derek Thomson, PwC Capital Markets Research Leader
The US IPO markets had a strong Q2, with 66 IPOs raising $16.0 billion, the most active Q2 since 2014. Half of this IPO activity occurred in June, which experienced its highest monthly count in more than seven years. The June IPO count is reminiscent of January 2018, which saw the highest monthly Q1 volume since 2000. The value raised in Q2’18 was 23% greater than Q2’17 and more than double Q2’16. Average deal value for the quarter also increased, up 11% compared to one year ago, primarily due to a mega-IPO and several large technology IPOs. Positive equity indices and a healthy macroeconomic climate contributed to a solid quarter for the IPO market, as the broader equity markets returned to normalized levels with relatively low volatility punctuated by occasional spikes. The US economy heated up in Q2, as unemployment fell to the lowest level in 18 years, Q2 GDP growth was estimated above 4%, inflation surpassed 2%, and the Fed raised rates for the second time this year, according to PwC’s US Senior Economist.
Pharma and life sciences and technology, media and telecom dominated Q2 IPO activity
IPO activity was led by pharma and life sciences, predominately biotech firms, for the fifth consecutive quarter with 24 IPOs raising $2.5 billion, the highest quarterly volume of PLS IPOs since Q4’14. Technology, media and telecom followed, led by software IPOs, with 16 pricings raising $4.6 billion. Financial services saw an uptick in IPO activity in Q2, with eight IPOs raising $4.0 billion, and priced the only mega-IPO of the quarter at $2.75 billion.
Q2’18 IPO activity was slightly ahead of Q2’17, with 66 IPOs priced compared to 60 one year ago. The sector mix in Q2’18 has shifted to strongly favor pharma and life sciences and technology, media and telecom IPOs with 36% and 24% of total IPO volume, respectively, and was less diverse compared to prior quarters.
Q2 US IPO returns were 10x S&P 500 returns
Average IPO returns for Q2 were 29% – significantly higher than the broader US indices. The technology, media, and telecom sector led IPO performance with an average return of 58% for Q2, followed by the financial services sector which had an average return of 23%. Major US indices saw moderate growth in the quarter even as the NASDAQ reached a record high in June, mostly due to strongly performing technology stocks. The S&P saw significantly less volatility in Q2 as compared to Q1, and recorded a return of 3% for Q2 and 2% year-to-date. The equity markets responded favorably to corporate earnings, as 78% of S&P 500 companies reported Q1 earnings that exceeded expectations, the highest percentage in over 10 years.
Follow-on volume remained flat
Follow-on issuance in Q2’18 remained flat compared to the previous quarter, with 183 issuances raising $42.7 billion, a 4% reduction in volume from Q2’17. In addition to being the top sectors in terms of IPOs priced this quarter, the pharma and life sciences and technology, media and telecom sectors also led follow-on volume, with Q2’18 marking the 10th consecutive quarter with PLS as the frontrunner. The pharma and life sciences sector priced 66 follow-ons raising $5.6 billion, while the technology, media and telecom sector priced 36 follow-ons raising $10.9 billion. Follow-ons were priced at an average discount of 6.7% to the last trading price, an improvement over last quarter’s average discount of 7.8%.
High-yield activity fell to the lowest level in two years
The US high-yield debt market experienced the lowest volume of issuances since Q1’16, with 83 issuances raising $42.8 billion, representing an approximate 30% decline in both volume and value over Q2’17. Industrial products led volume with 23 issuances raising $9.2 billion, followed by energy, utilities and mining and consumer markets with 19 issuances raising $8.0 billion and 17 issuances raising $11.7 billion, respectively. Refinancing continues to be the primary purpose for high-yield debt issuance in a changing interest rate environment, with 59% of companies issuing debt to do so. The majority of issuers fell between a B and a BB+ rating, with fewer issuers below a BB+ rating than in the previous quarter. The average yield was 7.3% across all sectors against an average 10-year Treasury yield of 2.9% over the quarter.
What to watch
Current macroeconomic indicators are healthy and have contributed to a solid IPO market so far this year. Real spending is still growing faster than real disposable income, which means consumer spending has been constrained by incomes and will struggle to break higher if incomes don’t accelerate. This, in addition to a widening trade deficit is expected to lead to a moderation in GDP growth.
The Fed raised its outlook for the economy over the next 18 months and we expect two more rate increases before the end of the year. Volatility remains low and major indices continue to provide positive returns, which all point to continued strength in the US IPO market.
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