US IPO Market Contracts As Returns Slump In The Third Quarter by Renaissance Capital
The IPO market slowed in the 3Q 2015 to 34 deals, down 43% year-over-year, hurt by the broad market sell-off and specific sector conditions, including a near absence of tech and energy issuance. In addition, a significant number of IPOs were pulled or delayed due to market conditions or acquisitions. For the first time since 2011, average IPO returns were negative (-4%) and more IPOs ended the quarter below their offer price than above it. Health care companies again dominated IPO issuance thanks to biotechs, and for the first time in over 15 years the sector made up over half of the quarter’s deals, a trend that could be stymied by the sharp biotech correction at quarter-end. The technology sector, typically a cornerstone of the IPO market, had just one offering – the lowest level in over six years. Oil and gas IPOs evaporated amid low energy prices. The end of the quarter saw volatility at a new high, IPO returns at a new low, a dip in initial filings and a rate hike on the horizon, all of which suggest that IPO activity will continue at a slower pace than 2014 and will require greater price concessions on the part of issuers. We now enter the 4Q 2015 with several large offerings in the queue including Ferrari and Pure Storage, which should set the tone for a packed IPO pipeline.
- Quarterly Proceeds Falls to a Four-Year Low, But IPO Count Stays Above 2009-2012
- Three-Quarters of IPOs were Health Care and Consumer; Tech had Just One Deal
- Consumer Sector Produces Three of the Five Largest Deals; Other Large IPOs Pulled
- Over Half of IPOs Have Negative Returns, Exacerbated by Broader Market Plunge
- Biotechs Make Up Best and Worst IPOs
- LBOs Dry Up But Private Equity Remains Active; Venture Capital Held Up by Health Care
- IPO Pipeline Swells with Several Large High-Profile Names
Quarterly Proceeds Falls to a Four-Year Low, But IPO Count Stays Above 2009-2012
IPO activity fell 43% compared to the prior year period, tying the 1Q 2015 for the slowest quarter in over two years. IPOs raised less capital than any other quarter since the 3Q 2011, the last time volatility was this high and quarterly IPO returns were negative. Even without Alibaba’s $22 billion IPO in 2014, quarterly proceeds would have been down 68% year-over-year. Despite the relative slowdown, IPO activity remained above the post-recession levels seen in the third quarters of 2009-2012. The average IPO produced a better return from the offer price (-3.9%) than the S&P 500 (-7.0%), entirely attributable to above-average first-day pops, as aftermarket returns meaningfully trailed all major benchmarks.
Three-Quarters of IPOs were Health Care and Consumer; Tech had Just One Deal
The health care sector has dominated IPO issuance since 2013 due to a two-year biotech binge. For the first time in at least 15 years, health care IPOs accounted for over half of the quarter’s offerings. During the quarter, 15 of the 18 health care IPOs were biotechs, a trend that appears threatened after the end-of-quarter correction. Consumer IPOs made a strong showing, with several high-growth names such as Planet Fitness, Blue Buffalo Pet Products and Amplify Snack Brands. The technology sector saw just one software company go public, cybersecurity software vendor Rapid7, making it the least active quarter for tech since the 1Q 2009. During the third quarter there were no oil and gas IPOs. The two energy deals, both in the solar space, are among the quarter’s ten worst-performing deals. One Chinese company – a wealth manager – managed to go public, along with an investment bank (Houlihan Lokey), an online lender (Live Oak) and an insurer (Conifer). There were no dividend-producing REITs or MLPs. While we do not track blank check companies as IPOs, it is worth noting that nine such companies became listed in the third quarter and raised a combined $2.2 billion, more than any sector.
Consumer Sector Produces Three of the Five Largest Deals; Other Large IPOs Pulled
The ten largest deals raised a combined $3.2 billion, including just two with a deal size of more than $300 million. A lack of large LBOs led to an average IPO deal size of about $150 million in the third quarter. Larger IPOs are generally more insulated from wide swings, but the top ten ended the quarter with an average return of -27%, much worse than the overall group. Only two closed the quarter above issue, and the 7% return from Planet Fitness made it the group’s top-performer. Three private equity-backed consumer goods companies made it in the top five. These included Blue Buffalo, Performance Food Group and Amplify Snack Brands. NantKwest was notable for achieving the largest-ever valuation at IPO ($2.6 billion) for a development-stage biotech, though it lost over half of its value by quarter-end. The energy sector typically produces more large IPOs, but the impact of low oil and gas prices appears to have spilled over to MLP issuance (an active segment of the IPO market in recent quarters) and, based on the performance of TerraForm and Sunrun, renewable energy as well. Energy & Exploration Partners withdrew a $400 million IPO and Freeport-McMoRan Oil & Gas delayed its estimated $1 billion offering. Acquisitions took SunGard, Par Pharmaceutical and SRA Companies out of the IPO pipeline, each of which would have been in the top five.
Over Half of IPOs Have Negative Returns, Exacerbated by Broader Market Plunge
Investors unable to get in at the IPO price would have been better off avoiding IPOs. The average first-day return was surprisingly strong at 18%, the highest level since the 1Q 2014. Prior to September, valuations generally went unchallenged; ten deals (29%) in the 3Q 2015 came in below the range, including the four that priced on the last day of the quarter. High initial valuations and plummeting equity markets led to dismal aftermarket performance – the average return for IPOs after the first day was -19%, and 26 companies (87%) traded down from the first-day close. Altogether, IPOs averaged a loss of 4%, the lowest since the 3Q 2011.
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