IFR US ECM Roundtable 2013
The US equity capital market is enjoying a long-awaited boost as investors thrust cash into equity funds with an enthusiasm not seen for decades. Faced with anaemic returns from fixed-income investments and racing to catch up with index gains, investors are embracing primary issuance with great verve.
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The mood at IFR’s US ECM Roundtable held in late July was uplifting, with those present predicting that this is just the start of a multi-year flow – a shifting in tectonic plates, as one participant said.
To describe the turn in investor sentiment as breathtaking would be an understatement. IPOs are able to secure premium valuations even when equity indices dip. Biotechs are regularly pricing, not pulling, new issues.
In mid-August, when investors have typically mentally and physically checked out, Envision Healthcare met a rapturous response despite a main rival going bankrupt during roadshows.
So far this year, US domestic equity funds (excluding ETFs) have taken in US$62.3bn, reversing a seven year trend of declines and providing capacity to support new issues. High-yield debt funds, by comparison, witnessed outflows for the first time in years.
The depth and breadth of investor appetite has also been notable. The window has been wide open, almost without exception, for 15 consecutive months.
A total of 111 companies had raised US$27.1bn from IPOs listed on US exchanges through the end of July, with a diversity of launches from traditional software/big data and growth industries and biotechs as well as cyclical sectors such as industrial and housing.
At the current run rate, full-year issuance of 190 IPOs would represent a post-crisis high.
Diversity is a good measure of whether the current run can continue and the charts showing US ECM issuance by sector reveal just how fractured volumes are. In 2013 so far, the four largest contributors total just over 50% of activity, compared to the same period in 2012, where high tech companies alone provided over 60% of volume.
The nascent recovery in equity-linked shows that diversity also extends to product type.
The contribution of the JOBS Act, increasing issuer confidence and improving deal execution for early-stage companies, is also acknowledged.
Block trades is another area where the US has shown it is ahead of the EMEA and Asia-Pacific regions. Competition in the other regions is so fierce that many active banks have been wounded this year, yet in the US – where the structure is still relatively new – it is a profitable business. Risky? Yes. Aggressive? Sure. Profitable? Definitely.
Private equity firms have been quick to take advantage of the clamour to buy, both with IPOs and sell-downs in recently listed entities. They have also discovered a willingness on the part of investors to look further down the road, not worrying about day one leverage, leading to new issues with unprecedented leverage ratios.
Risk is being embraced by all market participants.
As our Roundtable concludes: “2013 is going to be quite lovely.”