2017 Annual US Capital Markets Watch

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Did you know that in 2017...

  1. All major US indices reached record highs
  2. IPO returns outperformed the equity markets, averaging 27% at year-end
  3. The high-yield market saw positive year-over-year growth in both deal volume and value for the first time since 2012

All three major US indices had a record-breaking year in 2017

In the equity markets, 2017 was a year for the record books. Continuing the positive trend at the end of 2016, this year started off strong and kept going. This historic performance was supported by a solid economy with US Q3 GDP growth at 3.2%, the highest quarter in over two and a half years. High corporate earnings growth and a record-low interest rate environment combined to fuel a healthy macroeconomic outlook. Unemployment was at 4.1%, a 17-year low, and market volatility hit a 24-year low. Consumer confidence in November was the second-strongest in 13 years.

2017 IPO volume and value surpassed last year’s results

A relatively active US IPO market in 2017 reversed the declines of the prior two years and represented one-quarter of global IPOs. IPO volume in the US returned to meet its prior 6-year average, with a wide diversification of industries.

2017 was a choppy year with a quiet summer and active second and fourth quarters, including November, which was the busiest month for IPOs in two years.

The number of foreign IPOs doubled to 33 in 2017, accounting for 18% of IPOs.

Spin-off activity declined this year, with only 19 spin-offs and 7 carve-outs completed.

IPOs outperformed the equity markets

Investors continued their search for yield and again were attracted to the IPO market, which offers above market returns for relatively low risk in a transparent reporting environment. The IPO market produced year-end returns of 27%, outperforming the S&P 500 year-end return of 19%.

Less than 20% of the year’s IPOs had selling shareholders, indicating quality of issuers and a certain level of confidence in future stock performance.

Well-diversified market provided high returns with a positive outlook

Pharma and life sciences again led the way with 42 IPOs raising $4.0 billion.

  • Investor demand is up as 2017 saw more issuers with better drugs, higher reimbursement rates and a larger addressable market.
  • Pricing dynamics vastly improved, with 86% of pharma and life sciences IPOs pricing within or above the range in 2017, compared to only 53% in 2016.

Special purpose acquisition company (SPAC) IPOs followed closely, with 34 IPOs. This year’s increased volume of SPAC IPOs can be attributed to several factors:

  • Bulge-bracket underwriters are increasingly underwriting SPAC IPOs.
  • Sponsors now include blue chip PE firms and well-known entrepreneurs.
  • Structurally, SPAC acquisitions have become easier to complete.

Technology, media and telecom (TMT) IPOs also experienced higher volume this year with 33 IPOs.

  • The majority of TMT IPOs continued to be software companies, dominated by enterprise SaaS.
IPOs by sector

Diversification helped bring larger deal sizes in 2017

There were three mega-IPOs this year, compared to four in 2016, however average deal size in 2017 was up to $244 million, the highest since 2014 when the average deal size was $314 million. This was primarily because small pharma and life sciences IPOs made up less of the total 2017 IPO activity, with PLS only 23% of total IPO activity, compared to 2016 when PLS IPOs made up 29% of total activity. Industrial Products IPOs had the largest average deal value at $377 million, followed by TMT IPOs with an average deal value of $372 million.

Rising equity markets drove follow-on issuance as insiders sought to take advantage of strong returns

Follow-ons had a solid showing in the first half of 2017, with 211 issuances in Q1 and 190 in Q2. The market slowed in the second half of the year, with 157 issuances in Q3 and 179 issuances in Q4.

Follow-ons were priced approximately 5-10% below market price in 2017, with nearly 90% of follow-ons being accelerated book-build or bought deals.

Refinancings drove high-yield debt activity in a record-low interest rate environment

2017 was the strongest year in the US high-yield debt markets since 2014, reversing a downward trend with 511 deals raising $277 billion, representing a 41% increase in activity from 2016.

The US high-yield market was primarily driven by companies seeking to refinance, resulting in two thirds of activity and dollar value raised this year used for refinancing.

The oil and gas sector had its best year since 2014, with 74 deals raising $39 billion, up 54% from 2016. After showing signs of a late 2016 recovery in energy prices, 2017 saw greater stability surrounding energy prices which resulted in strong participation from oil and gas issuers looking to refinance their existing debt.

Average spreads across high-yield bond types decreased 64 bps on average. The increase in appetite for risk in addition to the search for yield led bond investors to seek the more speculative bonds such as those rated CCC+ which had a sharp increase in demand and tightened spreads, with 57 deals in 2017 compared to only 22 in 2016. As a percentage of all issuances, CCC+ rated bonds accounted for 11% of all issuances, compared to only 6% in 2016.

US high-yield issuances in the industrial products and energy, utilities & mining sectors

Please note: Excludes IPOs with deal values that are less than $25 million, domestic market uplistings, best efforts offerings, oil and gas royalty trusts, business development companies, and Reg A offerings

Contact us

Jeff Kotowitz
Capital Markets and Accounting Advisory Services leader, PwC US
Tel: +1 (415) 498 7305
Email

Daniel Klausner
Capital Markets Advisory Leader, Deals, PwC US
Tel: +1 (646) 818 7783
Email

Derek Thomson
Capital Markets Research Leader, Deals, PwC US
Tel: +1 (646) 416 0386
Email

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