The US IPO market has endured a difficult first half of the year and indicators suggest the rest of the year will be a struggle. According to Dealogic, H1 2016 saw just $7.2bn raised from public offerings, the worst showing since 2009. The mood among investors remains poor, and hedge funds have also underperformed.
The first quarter of 2016 saw just nine companies make their debut on US stock markets. Although more than 30 companies went public in the second quarter, Dealogic’s data suggests that 2016 is on track to be the worst year for IPOs since the calamities of the financial crisis. Since time is running out for things to improve, 2016 may be a red letter year for all the wrong reasons.
Hostess IPO offers hope
News in early July that the maker of Twinkies – Hostess Brands – is to launch an IPO in the second half of 2016 was a boost to the flagging IPO market. However, one notable public offering will not revive the industry, and a flurry of other deals is needed to significantly bolster the IPO space. Hostess, according to a statement announcing the deal, has agreed to sell a majority stake in itself to a public-affiliated acquisition vehicle of Gores Group LLC for about $723m. Once this deal has been completed, the company will launch its IPO.
Activity has been rather subdued in 2016 to date. There have only been 43 US IPOs, a 59 percent drop year on year, according to data from Renaissance Capital. However, companies that did go public in the first half of 2016 are up 16 percent on average from their offer price. This marks a significant improvement from last year’s figures, which show that companies that launched in 2015 are currently down 11 percent from their IPO price, according to Dealogic.
Though the IPO outlook appears to have improved, the second half of 2016 remains an unknown quantity. Various political and economic issues have taken centre stage, including the fallout from the UK’s Brexit vote. Investors remain skittish, as uncertainty has been the only real certainty in 2016. The debate surrounding a potential rate hike by the Federal Reserve dominated the early part of the year before giving way to Brexit shockwaves, a slowing Chinese economy and geopolitical concerns surrounding terrorism. It is little wonder that the first half of the year saw depressed activity. The controversial and protracted nature of the looming US presidential election has also impacted IPO activity, and will likely continue to do so.
The sale of Hostess to a special-purpose acquisition company (SPAC), as announced in July, is a notable development in the US IPO space. It indicates an increasing trend of corporate owners beginning to look beyond the traditional IPO market to complete deals. The sale to the SPAC will allow Hostess’ new private equity owner, Gores Group, to monetise much more of their holdings than they typically would in an IPO.
As IPOs have suffered, SPAC related deals have enjoyed a considerable resurgence in recent months. Much of the renewed interest in these types of deals has been driven by the PE industry. Just 42 companies raised $8.2bn on US exchanges in the first half of 2016, a volume drop of 60 percent from the same period last year, according to Dealogic; however, five SPACs went public in the first half of 2016, raising $1.6bn for use in future purchases. As a result of this activity, SPACs enjoyed their busiest first half of a year since 2008. SPAC activity is still some distance away from 2007, which saw $12bn raised across 66 deals, but H1 2016 could be a pivotal period for both SPACs and IPOs. Of course, IPOS will not disappear from the corporate agenda, yet the revival of SPACs has given boards an alternative means of monetising their holdings.
According to Renaissance Capital, a manager of IPO-tracking ETFS, the most active sectors in the IPO space were healthcare and technology. These sectors had the highest returns, coming in at 37 percent and 31 percent respectively.
The second half of the year could see a slight recovery in the US, even if the uptick is negligible. The success of tech ‘unicorn’ Twilio – the first such IPO of 2016 – in May has boosted confidence thanks, in large part, to the fact that the company raised more than expected during its debut. The company priced at $15 per share – above the $12 to $14 range which was the initial target – and raised $150m through the sale of 10 million shares. It now has a market capitalisation of $1.2bn. Japanese messaging app maker Line Corp also launched an IPO in mid July, raising more than $1bn in the biggest tech offering of the year to date.
A number of major IPOs in the US are poised for the second half of the year, so offerings like Twilio may point the way forward for many companies, but it would appear that SPACs will have a considerable impact on activity going forward.
© Financier Worldwide