July 12, 2017
By Derek Thomson, Capital Markets Research Leader, PwC
US IPOs had their strongest quarter in two years amidst a backdrop of stable economic indicators, strong job growth, and improving corporate earnings. Record stock market levels trading at 18 times earnings, and low volatility also supported a strong IPO pricing pace. The second quarter of 2017 saw 63 US IPOs raise $13.1 billion. This is more than double the volume seen in the quiet first quarter and more proceeds than in the first quarter despite large debuts in that quarter from two IPOs which raised a combined $5 billion. The upward trend in amounts raised has continued with quarter-on-quarter growth for five consecutive quarters. After the first six months of 2017, US IPOs have already raised more capital than in the full year of 2016 and are already at 73% of the volume of full year 2016.
Diversity and quality are healthy indicators for the US IPO markets
Investors showed interest in a broad range of industries, and a number of high quality issuers came from across a diverse spectrum of products, services and markets. Pharmaceutical and life sciences companies were the most active issuers in the second quarter, representing almost a quarter of all IPOs, but in keeping with the smaller biotech capital raises they did not represent the most capital raised. Continued uncertainty surrounding the Affordable Care Act is likely holding back a number of potential larger issuances in the pharma space. The entertainment, media and communications industry saw the largest IPO of the quarter raising $1.9 billion. The oil and gas industry showed a return to the IPO markets, indicating a level of investor confidence that despite continued low oil prices, recent structural cost reductions can help provide profits in the industry.
Special purpose acquisition companies, which proved popular a couple of decades ago, continued their comeback as evidenced by their rising deal values, participation by large PE firms and the first SPAC IPO on the NYSE’s main exchange.
IPO returns outperform US indices even as indices reach record highs
US IPOs posted another quarter of strong returns, with second quarter IPOs returning 11% on average, significantly outperforming the 2.6% quarterly return of the S&P 500 and the 2.1% return of the Russell 2000. Second quarter consumer markets IPOs returned 27% on average, the highest performing sector, primarily due to one IPO that has returned over 80% since it priced. Technology IPOs continued to be top performers, and technology ranked as the second best performing sector with average returns for second quarter tech IPOs returning 20%, consistent with the previous quarter.
Financial sponsors remain active
Financial sponsors and venture-capital backed a combined 44% of the quarter’s IPOs, which although less than the prior quarters 67% share of the IPOs, is nonetheless a positive sign for US IPO markets and represented 64% of the $13.1 billion capital raised. Financial-sponsor-backed IPOs have a history of returning slightly higher than corporate-backed IPOs and often feature follow-on equity offerings within 12-18 months depending on market conditions as sponsors sell down their stakes.
Follow-ons slow after robust first quarter
The US follow-on market had a slightly slower but stable quarter with 189 issuances raising $37 billion, led by the pharma & life sciences sector with 58 deals raising $7 billion, along with strong investor interest in REITs and technology companies.
Rate increases lead to an expected decline in US high-yield issuances
After two rate increases from the Federal Reserve in the first half of 2017 and expectations of another possible raise to come in the Fall, it is becoming marginally more expensive for companies to carry debt and therefore, a decline in issuances is not unusual. In Q2 2017, activity in the US high-yield market slowed down compared to last quarter, with 119 deals raising $62 billion, which is a 17% decline in volume and 25% decline in issuance value from the previous quarter. In line with recent years, refinancing accounted for approximately two-thirds of the deals, with most of the remaining amounts backing acquisitions.
General market conditions, despite a slowdown in growth to 1.4% GDP in the first quarter, are supporting well-prepared issuers to successfully complete their IPO – the window is open. Shifting business models in numerous industries are driving innovation at all levels of the economy and in all sizes of companies, which in turn is creating a strong supply of IPO candidates. On the buy-side, investors are still searching for growth, and IPOs have consistently returned well when compared to key benchmark indices. As with recent quarters, some uncertainties remain around global macro-economic developments, and these could increase market volatility and shut down the ability of companies to IPO at reasonable valuation levels. This reinforces the importance of IPO readiness and positioning companies to take advantage of an open window for US IPOs.