US IPO market is poised for recovery

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S&P at record highs, while IPOs are 60% down year on year; disconnect between stock market and new issues.

By Ben Edwards

While the US stock market continues on its blistering run, the pace of initial public offerings has been floundering. Companies raised just shy of $8.2 billion from US share listings in the first half of 2016, 60% lower than the same period a year earlier, and the lowest at this stage in the calendar since 2009, according to Dealogic. 

Despite that glum set of numbers, bankers seem unfazed.

"There’s nothing wrong with today’s IPO market – the window hasn’t been closed," claims Anthony Kontoleon, global head of equity syndicate at Credit Suisse in New York. "It’s been more supply-driven, meaning issuers just haven’t decided to come to market. Part of that is because they’ve been watching and trying to ensure the water is warm before they dip their own toe in, but the sparse IPO market this year hasn’t delivered enough consistent data for issuers to get a good feel for it."

After a shaky start to the year that crushed stock market indexes across the world, sentiment has rapidly improved. The S&P500 soared to a record high in July, shrugging off a brief blip in June after the UK vote to leave the European Union. That disconnect between the health of the US stock market and the dearth of new IPOs has left some bankers convinced the new-issue market is poised to rebound.

Lost year

"It was looking like a lost year for IPOs," says Joe Culley, head of equities at Janney Montgomery Scott in Philadelphia. "But we’ve been in this bull market extension with indices hitting all-time highs and it’s very rare in this country to have an anaemic IPO market and equity valuations at record highs for too long. Either we’re due for a correction or the IPO market is going to really rip from here. I think it will be the latter."

There are some signs backing that theory. Twilio, for example, in June became the first US IPO to price above range this year, with its share price jumping 92% on its first day of trading. Then in July, Japan’s Line Corp priced its bumper $1.1 billion dual-listed IPO well above its initial range, before trading up 32% on its first day.

"Twilio was a signal that the IPO market in the US is back open for business, and there’s certainly appetite from investors," says Corey Shull, an equity analyst at T. Rowe Price in Baltimore.

New deals are being lined up. The 180-day IPO backlog ticked up to 33 in July from 30 in June, Dealogic data show. And while August is typically quiet as the market shuts for the summer break, bankers and IPO advisers are backing activity to increase in the autumn, paving the way for a busy 2017.

"There are a lot of companies that are gearing up to go public and are on the runway right now, going through the processes, making their filings and getting everything in order, so there’s a large pipeline ready to execute their IPOs," says Ian Schuman, global co-chair of Latham & Watkins’ capital markets practice in New York.

That potential revival is likely to be underpinned by a wave of tech deals that are expected to go public over the next couple of years. And previously dormant sectors such as energy could soon make a return. 

 Mike-O'Leary-160
"We’re beginning to see  [energy] companies talking to the investment banks  about coming to market either this fall or early next year" 
Mike O’Leary, Andrews Kurth

"We’re now beginning to see [energy] companies talking to the investment banks about possibly being ready to come to market either this fall or early next year," says Mike O’Leary, a partner at Andrews Kurth in Houston. "That’s a real sea-change and it’s a function of people believing now, at least as far as oil is concerned, that we’re getting closing to an equilibrium of supply."

Other bankers reckon companies from growth sectors are likely to have the best access to the IPO market for the remainder of the year.

"Growth stories, clean balance sheets, attractive and growing yields and, importantly, US-based or predominantly US-based investment themes. If you were to IPO with those characteristics, you will likely find a welcome reception," says Mary Ann Deignan, co-head of global ECM at Bank of America Merrill Lynch in New York. 

Risks

A number of risks might yet stymie deal flow. The US presidential election in November is likely to be more turbulent than usual, which could disrupt the IPO market. Earnings season – already under way – could have a similar dampening effect if results disappoint. And the continued uncertainty about the timing of the next interest-rate hike could also scupper deal plans.

"If the rate view alters, it can change the way people view the market; and if it moves sooner and people think we’re in a rising rate environment again, it could create headwinds for new issues," says Deignan.

Yet given the relative lack of volatility after a succession of macro shocks – the VIX volatility index was at a two-year low in July – market watchers are expecting the backdrop for new deals to remain benign.

"We’ve seen the markets are amazingly resilient, so while they may have shut for a few days after Brexit, they pulled back," says Richard Truesdell, co-head of global capital markets at Davis Polk in New York. "We’ve had countless other even more dramatic jolts to the system over the past couple of years and the market continues to shake them off and move along. We’ll continue to see periods of temporary jolts and then continued slow steady progress upwards in terms of deal volumes."