US bankers remain uncharacteristically cautious about the outlook for new equity issuance volumes in 2016 as they battle the same factors that constrained ECM activity in the second half of this year.
The number of IPOs in the US fell 45% in 2015 amid poor aftermarket performance and the extended woes of sectors such as energy and tech.
Still, overall ECM issuance was down only slightly as M&A fueled a number of large secondary offerings.
An ageing bull market, macro headwinds and the US equity market’s July-to-September correction contributed to more challenging conditions that bankers fear will spill over into the new year.
“I think it is going to be active but not light it up busy, at least in the first quarter,” one senior ECM banker at a bulge bracket firm said.
In the IPO market specifically, deteriorating performance that saw more than half of IPOs trade below their offering price and softer pricing dynamics later in the year (most IPOs after Labor Day priced below range) drove the decline in deal volumes.
According to Renaissance Capital, 2015 IPOs popped an average of 14% on debut (similar to previous years) but overall returns were -2% for the year, well down from 21% in 2014.
The underperformance of most hedge fund strategies last year also curbed the enthusiasm of some of the most aggressive buyers of new issues.
In the third quarter, hedge funds saw a US$95bn decline in hedge fund assets, the first quarterly decline since the second quarter of 2012 and the largest quarterly asset decline since 2008. Bankers fear a continuation of that trend in the early part of 2016, dulling these funds’ appetites to play the new issue calendar.
The fall in oil prices and associated energy sector turmoil also closed off a rich source of dealflow but there are some hopes that the sector will recapitalise through equity issuance if crude stabilises.
Yet the MLP sector, traditionally a heavy source of yield-oriented ECM product for many retail investors, fell 40% last year.
”It is clear that many MLPs will have difficulty raising new capital to expand or complete existing infrastructure at present borrowing costs and cost of equity capital,” Cumberland Advisers’ MLP strategist Rick Daskin wrote in a note to clients, adding rather than raise equity many would postpone, stretch out, or cancel new capital expenditures, get capital injections from sponsors or general partners, or form joint ventures with outside investors to complete projects.
“Absent any of these alternatives, partnerships can cut distributions and fund projects out of retained earnings.”
Though many bankers expect a slow start to the year, there is still a heavy backlog of IPOs as a result of many companies making the decision early in the fourth quarter to defer going public until 2016.
Sponsor-backed companies such as Laureate Education and Spanish language broadcaster Univision Holdings updated their IPO filings over the Christmas season while several tech companies including enterprise software provider Nutanix and IT hardware company Acacia Communications are eyeing an early 2016 listing after revealing their IPO ambitions in December.
On Pitchbook’s numbers, there are 130 private tech companies valued at more than US$1bn each and nearly US$500bn in total and many of these so-called “unicorns” will seek to go public over the coming years.
Bankers had been predicting that 2016 would see some high-profile tech companies come public (names like Snapchat and Uber) though recent signs that private valuations are turning down and the preference for some companies to remain private has cast some doubt over that prospect. A number of high-profile tech IPOs in 2015, including Box and Pure Storage, went public at valuations that implied the IPO was a “down round”(struck at a valuation lower than the last private round), a factor that may have constrained deal supply.
The 2015 ECM year was more defined by its heavy reliance on issuance from the healthcare sector, including the most active year on record for biotech IPOs and a marked widening in the number of generalist investors prepared to support these deals. The sector is typically busy early in the new year and may continue to deliver steady levels of activity and remain a bright spot for the banks.
In 2015, there were 152 US-listed IPOs raising a total of US$32.2bn of proceeds, led by First Data (US$2.8bn), Tallgrass Energy (US$1.4bn), Columbia Pipeline Partners (US$1.2bn) and Ferrari (US$982.4m). Bank of America Merrill Lynch was the most active bookrunner, followed by Goldman Sachs and JP Morgan. Proceeds werewell down from US$93.6bn (276 deals) in 2014, even after excluding 2014’s US$25bn Alibaba IPO and six US$2bn-plus new issues.
Including IPOs and secondaries, US companies raised US$196.4bn in equity proceeds from 775 deals in 2015. JP Morgan was the most active bookrunner, followed by Credit Suisse and Goldman Sachs. The biggest offerings were Actavis’s $4.2bn secondary, three Citizens Financial selldowns by Royal Bank of Scotland totalling nearly $9bn and a $2.7bn block trade over Blackstone’s stake in Hilton Worldwide.
Overall volumes were only slightly shy of 2014’s US$213.2bn in 896 deals, with secondary offerings making up for most of the shortfall in IPOs.