The 2016 US IPO market for PE-sponsored and VC-backed companies has been slow, to say the least. Through 3Q, US-headquartered companies had raised just $7.2 billion across 49 completed offerings, but with political uncertainty possibly contributing to market volatility, will IPOs be able to rebound in 2017?
2016 IPOs on pace to record lowest level since 2009
Thus far into 2016, the IPO market has continued to suffer considerably from a basket of headwinds stemming from both domestic and political strains, diverging global market outlooks, and a significant amount of capital sitting in the funds of private financiers able to prolong the private lifetimes of many companies that traditionally would be on the cusp of IPOing. In fact, the first month of the year saw no IPOs come to market, and for private equity, no portfolio companies completed a public offering throughout the entire first quarter o f t he year! A t t he current pace, 2016 is set to see both capital raised and completed IPO counts come in at their lowest levels since 2009.
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For PE, many managers continue to take advantage of strategic acquirers hungry to purchase growth rather than build organically. However, the sponsor-backed listings t hat we’ve seen have tended to be rather large compared to the rest of the market, a trend indicative of mangers holding certain assets that might simply be too large to try and push to a strategic or to another PE firm.
For VC, we continue to see the most highly valued companies remain private. Just two VC-backed companies valued at over $1 billion came to market and although both were able to list in a relatively smooth manner, we haven’t seen them set the tone for other heavily-funded venture portfolio companies. If you h ave any questions or comments on the analysis and datasets within this report, feel free to reach out to us at [email protected]
US PE and VC-backed IPO activity by quarter
Despite a recent wave of IPO pricings giving rise to speculation regarding the IPO window opening, 2016 collectively paints a very different picture. Three quarters through the year, just $7.2 billion was raised across 49 PE and VC-backed public offerings, reflecting declines of roughly 49% and 48%, respectively, relative to the same period last year. At the current pace, 2016 is set to see both total IPO capital raised and volume come in at their lowest levels since 2009, which saw just over $9 billion raised via 36 public listings.
With an abundance of capital available from both PE and venture investors, the incentives to move forward with a costly public listing simply aren’t there, especially when you couple the rich dry powder environment with an uncertain global economic, business, political and exit landscape. Public flotations tend to perform better during times where the public markets are stable and moving consistently higher, and while equities in the US are up YTD, we continue to remain a bit confused around the main drivers of equities in this environment. Earnings and revenue growth have remained less than optimal, and economists continue to forecast slow GDP growth, but the markets have fought off just about all signs of adversity, whether those be concerns around monetary policy, the UK referendum or even the surprising results of the US presidential election. On a relative basis, US equities have certainly outperformed the bulk of European and Asian stock markets in 2016, so while at first glance US public markets may look well suited to handle new listings, we think a notable driver of US stocks today stems from an investor base that has looked to avoid the turbulence we’ve seen in foreign equities. With that in mind, companies looking to list will need to prove to institutional investors that despite the sluggish macro environment we highlighted above, they have the stewardship, capital expenditure discipline and ultimately the business model to continue driving growth and profitability in a slowermoving market.
One trend we’ve noted when looking at private financings, especially on the PE side, has been the split in the quality of companies PE firms have chased. The result of this can be seen in the heightened multiples PE continues to pay to close deals, however there continues to remain a group of second-tier companies that simply can’t garner the multiples we’ve seen in recent years. We think we’ve noticed a similar occurrence in the IPO markets today. Through the third quarter of 2016, just under 12% of companies priced at the high end of their respective IPO range, yet we saw a rather impressive 60% of companies hit their target range, the highest figure we’ve seen since 2008, which saw nearly 67% of companies do that. Further, 28% of companies to list this year priced at the low end of their range, slightly less than the 30% and 35% figures we saw in 2015 and 2014, respectively. While total IPO activity has remained subdued, the quality of companies willing to move forward with a public flotation appears to be improving and such companies have had success completing offerings efficiently.
where institutional investor appetite lies for new offerings. Performance on the secondary markets will also be important to monitor, and that also applies to listings that see significant pops in their newly traded stock. While Twilio was able to come to market and hold a successful IPO, the fact that their stock traded up close to 300% within one month of listing should be looked at from a couple of different angles. Primarily, we should credit the company for standing out and attracting significant interest, yet we also think that stock could have been underpriced by its advisors. With little IPO activity for bankers to benchmark against at the moment, the task of marketing and pitching companies to institutional investors understandably may come with significant uncertainty. To say the least, syndicate desks will have their hands full finding the adequate equilibrium in terms of offering price for future listings next year.
PE IPO Activity
US PE-sponsored IPO activity by quarter
Through the first three quarters of 2016, PE-backed companies accounted for 37% of IPOs, which is about the same as 2015, but well below the portion we saw for most of the last decade. For comparison, PE-backed companies made up 72% of US IPOs in 2009, a number which has declined fairly consistently since.
18 PE-backed IPOs have been completed this year, raising a total of $5 billion, on track for the slowest year we’ve seen since 2008 in terms of both the number of IPOs and the funds that they raise. About half of the capital raised this year ($2.4 billion) has been concentrated in the offerings of just three companies: commercial kitchen supplier US Foods, pharmaceutical developer Patheon, and hotel and casino operator Red Rock Resorts. Two of these three, US Foods and Red Rock Resorts either have completed or are in talks to complete a debt refinancing post-IPO, a move not uncommon with companies who have recently gone public and subsequently have easier access to the full range of capital markets.
On a quarterly basis, PE-backed IPOs have fared better in recent months than the annual data would suggest. After a grand total of zero IPOs in the first quarter, both 2Q and 3Q of this year produced nine IPOs each—still far from the record numbers put up in 2013-2014, but more of a reversion to the mean rather than a complete vanishing act.
PE IPOs: Metrics
The median offering size for PE-backed IPOs has come in at $183 million, slightly down from the $186 million number we saw in 2015, yet relatively high on a historical basis. Compared to the entire IPO market, PE-backed offerings raised more than double the $90 million median we saw when taking a look at the offering size from both VC and PE-backed raises.
Larger raises are to be expected from PE-backed businesses due to the nature of where these companies typically lie in their lifecycles. Where venture capitalists back earlier-stage companies, PE sponsors can many times be operating companies that are multiple decades old. The mature nature of these businesses culminates in a group of companies that have been able to grow their revenues and respective businesses over a much longer period. Thus, while PE has potentially been able to help such companies boost margins and drive cash flows, the sheer size of these companies results in larger capital raising requirements.
At $863 million, the median post-valuation of PE-backed companies completing public listings this year came in at the highest level we’ve seen since at least 2005. Although many sponsors have had success selling smaller portfolio companies to other PE counterparts, as well as to strategics looking to put money to work acquiring PE-backed companies, the bulk of that activity occurs along the core middle market. Moving forward, sponsor-backed IPOs won’t likely increase dramatically, yet the ones that come forward will typically lay at the upper end of the size spectrum and thus, offering sizes and postvaluations should stay high.
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