IPO activity heated up in 2Q17 from 1Q17 as the number of new companies listing on U.S. exchanges more than doubled, while secondary issuance declined slightly quarter over quarter. Issuance activity for both IPOs and secondaries in 2Q17 was substantially higher than in 2Q16, when investors were concerned about volatile oil prices and the UK Brexit vote.
Overall in 2Q17, 67 companies went public (including blank check and closed-end funds), up 116% from the prior quarter and 97% higher compared to the same period a year ago. Meanwhile, secondary issuance was down 6% quarter to quarter but up 80% year over year.
The U.S. equity markets were characterized by stable-to-lower volatility through most of the quarter, providing a favorable backdrop for issuers. During the quarter, the S &P 500 and the Nasdaq Composite both set record highs. Corporate earnings grew for the third quarter in a row and appear poised to expand at a double-digit pace in 2H17 and at a mid-tohigh single-digit pace in 2018.
Investors able to purchase IPOs at the issue prices generally fared well in 2Q, as most IPOs opened at prices above the issue price. The ratio was approximately 3:1, favoring higher opens as opposed to lower or flat opens. We note, though, that this was a step back from the 1Q ratio, which was approximately 4:1. As well, later in the quarter, the deal quality seemed to deteriorate, as multiple IPOs opened below their issue price (Mersana Therapeutics, a biotech company out of JPMorgan, and Safety, Income & Growth Inc., a REIT out of BofA Merrill Lynch) or had the expected range lowered (which was the case for the high-profile Blue Apron Holdings Inc.).
From an industry perspective, IPO activity shifted a bit from prior quarters. The top sectors were Finance, Healthcare and Technology, as the Energy and Consumer sectors stepped back. We also note several successful capital-raises from companies based outside the U.S.:
For the secondaries on a sector basis, the trend was similar. Energy fell off and was replaced by Real Estate, joining Healthcare and Financial.
Looking ahead, we think the market for IPOs is likely to remain bullish through 2017. On the positive side: economic growth, led by the employment environment, appears to be accelerating; volatility remains low; and corporate earnings growth is expected to hit a double-digit rate, as the dollar stabilizes and oil prices continue their recovery. The IPO pipeline remains robust, with about 180 companies having filed with the SEC and a number of interesting recent filings (such as Dole Food Company; PQ Group Holdings Inc., a clean-tech company; Vencore Holding Corp., a cybersecurity company; Ranger Energy Services; and Cadence Bancorp).
In the tables on the following pages, we highlight select companies that our analysts thinks may be poised to enter the IPO markets at potentially attractive prices.
Table 1 features the Argus Top 30 Promising Potential IPO Candidates. This list has been selected from companies that have already filed S-1s with the SEC. It is based on factors that Argus believes are important for success in an IPO, including sales and earnings growth, a clean balance sheet, brand names, attractive industries and current management/ownership. Two of the companies that were on the Argus Top 30 list last quarter - Yext Inc. and Netshoes Cayman Ltd. - completed IPOs in 2Q. Yext was a hit, opening 27% above the issuance price, while Netshoes Cayman disappointed investors by opening 9% below the issue price before recovering a bit of ground and closing 1.5% lower on the first day of trading.
Source: Triad Securities, Argus Research
Table 2 is our Top 30 intriguing venture-backed private companies, including the so-called Unicorns such as Uber and Airbnb. This list includes companies in emerging industries such as cybersecurity and Big Data analytics, as well as companies whose investors include wellknown groups such as Kleiner Perkins and Adreessen Horowitz. One company from this list went public last quarter: Cloudera, a developer of a leading modern platform for data management, machine learning and advanced analytics. Cloudera was brought public by a group of underwriters led by Morgan Stanley, JPMorgan and Allen & Co. The shares were priced at $12-$14 and issued at $15. The first trades were 19% higher at $17.80
Source: www.sharespost.com; Argus Research. New to the list "*". Dropped from list: Avant, Cloudera, Oscar, SnapDeal, Sungevity
Copyright Argus Research Company. This report has been prepared for Triad Securities by Argus, an independent investment research company. This report has no regard to specific investment objectives, financial situations or the particular needs of any recipient. It should not be considered an individualized recommendation. All investors are encouraged to use multiple sources of investment information and to actively monitor their holdings. The security or industry discussed may not be suitable for everyone.
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