Sunny outlook as windows open
After US IPOs reached their highest level since 2000, bankers are hoping to make the most of the fertile conditions.
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Success breeds success. Last year, US stocks powered to a nearly 30% gain, the number of US IPOs hit their highest levels since 2000, debutantes produced an average return of 41% and investors finally shovelled their money back into actively managed stock funds. In ECM it doesn’t get much better than that. It is not surprising then that bankers are expecting even bigger and better fee-generating opportunities in 2014.
Already in January, several US$1bn-plus IPOs have hit the road, a continuation of the fertile conditions for deal pricing seen in the fourth quarter. The ECM pipeline is also building impressively, with sectors such as energy, technology and healthcare seemingly positioned for another hectic year and big IPOs from the likes of Ally Financial and General Electric’s credit card business in the works.
Perhaps the most impressive aspect of US ECM in 2013, in contrast to the prior five years, was the nearly complete absence of any periods when the capital-raising window was closed because of poor investor sentiment, even around difficult periods such as the US Congress’ bitter debt ceiling debate.
Coming into the new year, investors are more composed, many having adopted the view that the crisis years are over. Volatility levels are at post-crisis lows and remain in underwriters’ comfort zone. Declining correlation (implying greater stock divergence and less of a overwhelmingly macro influence on stock prices) have brought active/stock-picking funds that are the heart and soul of ECM into their own.
“By definition, IPOs are growth stocks so I think we are going to see a pretty strong bid for them,” said Joe Castle, the New York-based global head of equity syndicate at Barclays. Castle said he would be “very surprised” if US ECM volumes, which totalled US$235.9bn last year (including US$59.4bn worth of IPO issuance), are down in 2014.
Momentum aside, a further spur to 2014 issuance could come from a long-awaited pick-up in mergers and acquisitions. To the surprise of bankers, the robust ECM market in 2013 was not accompanied by consistently high levels of M&A and indeed financial sponsors used ECM extensively to take advantage of what they saw as a seller’s market. Greater M&A in 2014, of which there are already some signs, would not only drive higher equity market valuations but also directly trigger ECM deals since some takeovers require equity funding.
Yet after the experience of the past five years, it would be folly to assume plain sailing for ECM syndicate desks.
It is unusual for equity markets to take a breather after a strong year. Indeed, US equity markets have started the year in less convincing fashion.
While still calling for an up year, Goldman Sachs strategists concede the S&P 500’s forward price/earnings multiple is lofty and see a 67% chance of a 10% drawdown in stocks in 2014.
There is at least one obvious threat to equity returns, and by extension, good ECM conditions.
According to a BDO US survey released on January 7, 43% of investment bankers pointed to the Federal Reserve paring back its monetary stimulus as the biggest threat to IPOs
The counter-argument is that investors are now well-primed for this eventuality, have to some extent factored this into valuations and will handle this outcome without panicking.
Mark Hantho, Deutsche Bank’s global head of ECM, said the big question was whether tapering would prove relatively smooth or cause some pronounced dislocation, but the negative impact could prove greater in emerging markets.
In recent years, banks have stepped up aggressively to underwrite risk trades, particularly by purchased blocks from private equity firms, while large investors have increasingly seen ECM activity as a not-to-be-missed opportunity to build a position of size in specific stocks. The emergence of several block trades in the early part of the new year, also a way for banks to get early market share momentum, was a hallmark of 2012 and 2013 and looks likely to remain an important ECM theme as long as banks remain unbruised by these transactions.