April 2, 2018
By Derek Thomson, PwC Capital Markets Research Leader
The US IPO markets kicked off 2018 with a strong start, with 47 IPOs raising $16.3 billion. That made for the busiest first quarter since 2014, despite significant economic headlines that created volatility in the US equity markets. Q1 2018 was also a strong quarter in terms of dollars raised, seeing the most IPO proceeds raised in Q1 in more than seven years. January drove much of the pricing activity; it was the busiest month for IPOs since 2000, with a total of 20 IPOs raising $8.5 billion. While these numbers showed the strength of the US IPO market in the first three months of the year, the broader equity markets had a choppy first quarter, erasing early gains.
Pharma & Life Sciences and SPAC IPOs led volume
The pharma and life sciences sector continued its strong run, with 11 IPOs raising $1.0 billion, equal to Special Purpose Acquisition Companies (SPACs) that also saw 11 IPOs raising $2.0 billion, the highest quarterly number of SPAC IPOs since 2011. SPACs continued to gain in popularity as a financing vehicle in the US, raising increasing interest from institutional investors. The TMT and consumer markets sectors followed with seven IPOs each raising $6.1 and $3.3 billion respectively.
Q1’18 had a strong showing compared to a year ago, as overall IPO volume increased by 81%. In addition to SPACs having a strong quarter, the increase in activity was also led by the pharma & life sciences sector having nearly four times as many deals as compared to Q1 2017. The energy, utilities & mining sector also doubled the number of IPOs this quarter vs. a year ago, as the rally in oil prices extended beyond 2017.
IPO returns continue to outperform a volatile broader equity market
US IPO returns outpaced the broader equity markets with an average return of 6% for the quarter, while investors in the broader equity markets received flat returns QTD. The technology, media and telecom sector led IPO performance with an average return of 30% for the quarter, while the pharma & life sciences sector followed suit with 11 deals returning an average of 10%. US economic fundamentals are improving: Q4 2017 GDP was the strongest fourth quarter since 2013, the unemployment rate remains historically low and February jobs data exceeded expectations. These factors are helping to create favorable conditions for corporate earnings going forward, barring any headwinds like tariffs and uncertainty around rising interest rates and inflation.
Follow-on activity increased
Momentum increased for follow-on issuances in Q1 2018, resulting in a 3% increase from Q4 2017 volume, as 184 follow-on issuances raised $39.6 billion. Volume was led by the pharma and life sciences sector for the ninth consecutive quarter, as 87 deals priced raising a total of $8.9 billion. The technology, media and telecom and financial services sectors followed far behind with 30 deals each raising $5.6 billion and $8.6 billion respectively. Follow-ons were priced at an average discount of 7.8% to the last trading price.
High-yield activity significantly declined
US high-yield debt activity in Q1 2018 decreased by over 15% from the previous quarter, as 111 companies issued debt worth $65.5 billion while also recording a 3% decline in value from Q4 2017. Following a strong year in 2017, the energy, utilities and mining sector continued to lead activity with 33 issuances raising $18.0 billion in the first quarter of 2018 – the largest amount raised by the sector in a single quarter over the last three years. In line with previous quarters, over 70% of the issuances were carried out for refinancing, as companies raced to issue debt ahead of expected interest rate increases. Deals were relatively distributed between B and CCC+ ratings, yielding an average of 6.6% against an average 10-year Treasury yield of 2.76% over the quarter.
What to watch
The broader US economy continues to demonstrate a strong outlook given recent strong jobs data, continued low unemployment and strong corporate earnings. These factors create favorable conditions for the IPO market, which continues to offer significant alpha to the buy-side. Although the Fed had a hawkish tone with a rate increase in March, it offered investors more visibility around the Fed’s outlook for the economy and its plan for future increases. While volatility as measured by the VIX has waned compared to the levels seen in February, and major US indices have recovered somewhat from the market correction, investors will continue to closely watch future economic data and any new economic policies, such as potential tariffs that might signal faster than expected inflation and prompt the Fed to raise interest rates faster.
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