IFR US ECM Roundtable 2016
IFR’s US ECM Roundtable was held on September 12, just ahead of the Fed’s decision to hold the line on interest rates and the US presidential election. The Fed only postponed a cycle of rate-tightening and the end of the accommodative environment that has sustained the current bull market.
After a shaky start to the year, US stocks were up 4% at the time we convened and low-volatility throughout the preceding months highlighted investor willingness to look beyond collapsing oil prices, slowing Chinese growth, Brexit, and the surprises of US politics.
Yet large swaths of the equity capital markets failed to participate.
IPOs, in particular, had raised just US$10bn, anaemic in any year and in stark contrast to the US$25bn-plus venture capitalists poured into tech unicorns and other private companies.
Nevertheless capital formation, both public and private, has changed for the better.
Confidential filing and testing the waters, provisions of the seminal JOBS Act enacted in 2012, have facilitated investment not only in small companies, but influenced funding mechanisms elsewhere. Increasingly those market practices are being adopted by established, already public companies to expedite their funding needs.
Blocks and accelerated bookbuilds have totalled US$48bn, more than half of all follow-on capital raised and up from US$42bn at this time last year. Oil and gas companies, which factored in 30% of follow-on issuance, have capitalised on processes that allow capital to be raised outside of market hours.
In addition to speed and certainty of execution, costs to issuing clients are far lower.
However there are consequences from this efficiency. Investment banks need to be compensated for risks undertaken and the move to speed jeopardises basic functions essential to facilitating access to capital, caution our roundtable panellists. Research, advisory work, and investor relations are, in the words of one, “missionary work”.
Yet recovery of the IPO, the most lucrative of all disciplines, seems inevitable – and fees are unlikely to be cut.
Pushback on private-market valuations, and more restrictive terms on investment, show investors are unwilling to underwrite the illiquidity of remaining private.
The public markets are willing to take the baton.
Strong aftermarket performance of IPOs that have priced suggest the IPO problem is one of supply not demand – at the right price. A trio of September IPOs – elf Beauty, Nutanix and Trade Desk – represent diverse operations and each delivered 50%-plus gains on debut. Equity market underperformance has institutions willing to turn out to secure alpha.