December 19, 2016
By Derek Thomson, Capital Markets Research Leader, PwC
The end of the year has prompted many questions from clients and others in the industry about what’s ahead for the capital markets in 2017.
While each organization’s holiday wish list may differ, one overarching theme prevails – organizations are hungry to determine the best path to capital – to fuel their future, to adapt with agility and to ultimately deliver on the strategy they’ve laid out.
It was a dynamic year, to put it mildly with the US Presidential elections, Brexit, market volatility, and speculation on Fed moves on interest rates. The following are the four main conclusions I see based on the data we track – including IPO and high-yield debt activity each week.
US economy shows stronger signs of growth
The US economy is finishing 2016 with improving GDP figures, a solid labor market, the highest US 10-year Treasury yields in over two years, and the Federal Reserve showing increasing confidence with its December interest rate rise. Market volatility declines after the US elections are helping drive equity markets to record highs.
US IPO market the quietest in seven years
The US IPO market, despite the slowest start in seven years, recovered in the second half of the year to reach 123 IPOs raising $22 billion year-to-date – the lowest annual IPO activity seen since 2009. The highly active pharma & life sciences sector again proved most popular with investors accounting for more than a third of all 2016 IPOs, spurred on by a faster FDA approval process and declining drug pipeline from big pharma companies. Technology IPOs also had another strong year with investors supporting the adoption of cloud computing platforms across multiple industries. Pharma & life sciences and technology IPOs represented over half of the IPOs in 2016.
IPOs picked up in news-busy fourth quarter
The fourth quarter started on a positive note, with the last week of October seeing the second highest level of IPO pricings for the year before slowing down due to uncertainty surrounding the US Presidential election. Post-elections, the markets recovered quickly to help drive the fourth quarter to 36 IPOs raising $7.8 billion, which was in line with the number of pricings in the prior two quarters, and also in line with Q4 2015. Q4 proceeds raised were the highest quarterly offerings since Q2 2015, due in part to two mega-IPOs raising in excess of one-billion dollars each. Also led by pharma & life sciences and technology IPOs, the fourth quarter was noteworthy for the return of the oil & gas sector supported by a recovery in energy prices, with four IPOs after a virtual drought lasting more than a year.
IPO investors fared well in 2016, with a 19% return on average for the year, handily outperforming the S&P’s 11% return year-to-date, and was a reversal of last year’s relative underperformance of IPOs, which was the first underperformance since 2011. The banking & capital markets and technology sectors produced the best returns for IPO investors in 2016, with approximately 35% returns from offering price year-to-date. The fourth quarter’s best returns were also in the technology sector, with IPO’s providing an average return of 18%. Strong investor demand for returns helped 14% of the fourth quarters IPOs price above their range.
The US high-yield markets see a continued decline in issuances
The US high-yield markets continued to decline year-over-year in both number of issuances and proceeds raised, with 360 deals raising $228 billion. Declines in M&A activity have negatively impacted the broader loan markets, including high-yield LBO offerings. However volume declines have been somewhat offset by the large number of issuers refinancing ahead of possible interest increases. The entertainment, media & communications sector led the issuances both in dollars raised and number of issuances.
Q4 2016’s high-yield debt volume fell 19% from the third quarter, with 87 issuances raising $47 billion, but saw a 64% increase in volume over Q4 2015. Refinancings continued to be the impetus behind the majority of issuances, with especially high volume in the week prior to the Federal Reserve’s decision to increase interest rates, making it the second most active week for high-yield debt in 2016. The oil & gas sector’s presence in the high-yield marketplace increased significantly in the fourth quarter to represent the most active sector.
Looking ahead to 2017, a healthy pipeline and reduced uncertainty could produce a strong IPO market
After a slow start in 2016, activity picked up in the latter half of the year and there was a resurgence in the broader markets, both helping to create favorable conditions for companies that are looking to go public in 2017. Investors will likely keep a close eye on the impact of any change in policies or regulations, as well as the health of the US and global economy, and continue to monitor any major geopolitical events which may impact global growth forecasts.
Companies should prepare early in order to take advantage of opening IPO windows in 2017.
So to borrow the lyrics from a classic – ‘tis the season to be jolly!