IFR US ECM Roundtable 2015
IFR’s US ECM Roundtable was held on September 15, just ahead of the Federal Reserve’s decision to hold rates for another month. The decision pushed expectations for the start of the rate-tightening cycle into 2016 and extended the accommodative environment that has sustained a bull market.
Stocks have nearly tripled from post-crisis lows, even after factoring in recent sell-offs. Merger and acquisition activity is at historic highs.
But ECM has only been a minor beneficiary.
The surge in secondary markets has boosted valuations, which in turn should make a move into public markets more attractive for private companies.
However, IPO issuance on US exchanges is down roughly 50% in the first three quarters of the year, compared to the same period in 2014, as technology companies have been able to source capital privately from traditional public investors.
So-called “unicorns” – private companies valued at US$1bn (and remarkably plentiful considering their moniker) – threaten to disintermediate the role of investment banks in funding early-stage companies. Venture-backed companies have raised US$25.1bn in private rounds exceeding US$40m in the first three quarters of the year, versus just US$7bn raised in VC-backed IPOs.
Ultimately, unicorns will need to access the public equity markets for liquidity, though our roundtable panelists caution that migration may not be a smooth one.
Biotechnology companies have enjoyed unprecedented access to equity capital, with late-stage private funding leading to IPOs. In the midst of the “Golden Age of Innovation”, the industry so far this year has raised US$2.8bn via IPOs, following on from the record US$4.4bn in 2014 and in addition to US$8bn of private funding in 2015.
But they may have had their moment, as strains have appeared in biotech funding, in part due to electioneering politicians suddenly railing against the high prices of drugs.
US energy independence, a once-bullish prospect that supported capital formation, has been jeopardised, as low commodity prices threaten the viability of exploration & production companies. The collapse of oil to the low US$40s has, in turn, drawn into question the prospects for alternative energy and the yieldco funding model that supported development of solar and wind projects.
There are plenty of reasons for pause. From China to Greece, economic conditions globally are frail despite the ongoing recovery of the US. The prospect of higher interest rates threatens to choke access to capital that fuelled M&A and shareholder-friendly activities.
That is reflected in stock market volatility, as illustrated by the VIX that elevated into the mid-20s (at the time of the roundtable), historically a no-go for equity capital markets.
Yet we are told that companies and financial sponsors may be called to action by volatility.
In the weeks that followed the roundtable, Pure Storage provided a warning for unicorns with its disappointing IPO in early October; First Data stretched investor appetite for high leverage with its US$2.56bn IPO, the year’s largest deal; and Albertsons, the second largest US grocer, failed to reach agreement with investors and pulled its US$1.7bn IPO.
In short, the equity capital markets are at a crossroads.