Q2 2019 Capital Markets Watch

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IPOs continue to enjoy the open window

IPOs in the US made headlines in the second quarter, with a number of high profile IPOs. Some well known and highly anticipated companies became public, with varying degrees of initial trading success. The tech sector took many of the headlines illustrating that investors generally believe in the drive to gain market share and appear comfortable with a longer path to profitability. The market also saw some high profile retailers become public as they reposition themselves in a new and rapidly changing retail sector.

US IPO markets in the second quarter of 2019 priced 71 IPOs, raising $27.4 billion. This activity exceeds the historical average volume of IPOs in Q2 for the last 5 years, during which the IPO window has been open and been providing outsized returns. Potential geopolitical and macroeconomic headwinds have minimally impacted the volume of IPOs, and the pipeline for upcoming IPOs remains reasonably strong. Average amount raised per IPO this quarter skewed upwards with 5 IPOs raising more than $1 billion, including the 4th largest IPO in terms of proceeds raised in the past 10 years. Investors continue to seek outsized returns in the current low yield environment, and IPOs provide an attractive investment opportunity based on their returns and performance. This is despite global economic concerns about the tariff debate between the US and China, Brexit and the appearance of slowing leading economic indicators; all of which have the potential to reduce GDP growth going forward.

Megadeal outliers prop up TMT IPO value

Tech IPOs drove TMT to be the most active sector, and accounted for a third of all Q2 IPOs. 24 TMT companies raised $16.3 billion, mostly driven by market/ e-commerce platforms. This marks the highest quarterly deal value of TMTs since Q3’14. Additionally, TMT experienced a notable direct listing this quarter. Pharma and Life Sciences followed close behind with 20 IPOs and a total volume of $2.1 billion. The sector has been characterized by substantial biotech flow from pre-clinical to Phase 3, as well as the return of medical devices. In terms of proceeds raised, the Industrial Products sector raised $3.5 billion, and the ever-present SPAC vehicle continued its recent run of IPOs with 13 raising $2.9 billion.

IPOs generate lofty returns, driven by high growth companies

Average IPO returns in Q2’19 were 37%, primarily due to investor demand for high growth companies and one very strong retail performer. This marks the highest return of IPOs by quarter since Q1’17. Median IPO returns this quarter told a different story, with returns of 18.6% - still having outperformed the Russell 2000 Index return of -1.4%. The Consumer Markets sector led IPO performance returning 183%, followed by TMT returning an average of 35%.

Pharma follow-ons continue to lead in volume, as Financial Services leads in value

US equity markets priced 168 follow-ons raising $34 billion in the second quarter, a decrease in deal volume of 8.2% compared to the second quarter last year.

The Pharma and Life Sciences sector led in volume with 67 follow-ons, followed by TMT and Financial Services. The Financial Services sector led in value, raising $12.5 billion, followed by TMT raising $6.9 billion. Follow-ons were priced at an average discount of 9.2% to the last trading price.

Despite slowing economic indicators, volume of high-yield issuances climbed significantly

The last several weeks of the quarter saw a flurry of issuances as the 10-year Treasury dipped below 2% and spreads narrowed. There were 122 companies, mostly B to BB+ credit rated, issuing $69.4 billion in debt, which is a 37.1% increase in the number of issuances compared to the second quarter of 2018. The majority of these debt issuances were for refinancing as companies sought to lock in low rates. Some optimism has continued from the first quarter, as the Fed maintained rates and is hinting at potential decreases later this year, corporate earnings again beat expectations and spreads tightened. The average yield was 6.59% across all sectors compared to an average 10-year Treasury yield of 2% this quarter, which inverted compared to the 90-day Treasury yield for 25 days. An inversion in the past has been used as an indicator for a coming recession.

Consumer Markets led the field with 29 deals raising $17.2 billion. Industrial Products followed with 27 issuances raising $14.3 billion. Energy, Utilities and Mining followed third by volume with 21 issuances.

What to watch

Recently the US equity markets have been impacted by uncertainties across the globe, especially during May when volatility spiked mostly due to US-China trade relations both at the political and corporate level. The Federal Reserve is pondering whether it is appropriate to cut interest rates, which would tentatively be implemented in July. This could lead to some volatility in the market, especially as a new stimulus package was announced at the European Central Bank’s annual forum.

For the IPO market, Q3’19 could potentially see another uptick in IPOs as more Unicorns and high growth companies enter the stock market. The technology sector will likely continue to deliver large new entrants. Although market-leading indicators remain positive for now, there is some concern about the narrowness of this IPO market (focused on TMT, PLS and SPACs) and the relative paucity of activity from other historically strong sectors such as Financial Services, Consumer and Energy.

Please note: IPOs with deal values that are less than $25mm, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded.

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David Ethridge

US IPO Services Leader, PwC US

Daniel Klausner

Capital Markets Advisory Leader, Deals, PwC US

Derek Thomson

Capital Markets Research Leader, Deals, PwC US