JPMorgan’s head of global equity capital markets, Liz Myers, can name a bunch of reasons 2017 could see a strong rebound in initial-public-offering activity around the world.
Myers, whose team topped league tables for equity capital markets revenue in 2016 as well as IPO volume share in 2016 and year-to-date, did just that in an interview with Business Insider earlier this month.
“We’re seeing quite a sentiment reversal in the IPO market this year, particularly in the US, where January marked the best start to the year since 2014,” Myers said.
While 2016 saw fewer than 100 IPOs in the US, she said a typical year would see as many as twice that number. She expects to see a more active market in 2017.
“Both issuers and investors are approaching the market more constructively this year,” she said.
“Combined with a pro-growth backdrop, we expect to see a notable increase in IPO volumes this year.”
Twelve deals have priced in the US in 2017.
Myers walked through numerous sectors, from industrials to financials to tech, and laid out her expectations. She also said we could expect to see more cross-border activity this year, with foreign companies choosing to list in the US.
Here is what’s on Myers’ mind.
A strong start
Of the companies that did go public in 2016, more than 70% are trading up right now, Myers said. That’s up from 52% around this time last year.
“This aftermarket momentum reinforces positive investor sentiment toward the 2017 IPO class,” she said. “Follow-on offerings also tend to increase in number and size when valuations trend positively post-IPO.”
For private-equity or venture-capitalist backers, that offers the chance to sell down their stakes.
Also, of the nine deals that priced last month, two priced above their ranges and two priced at the top of their ranges. There were no IPOs in January of last year to compare with, but two of the six IPOs to price in the whole first quarter of 2016 were below range, Myers said.
Healthcare, industrials, and tech
Though only nine deals priced in January, the breadth of sectors they fell under was a positive sign, Myers said. Those include energy, industrials, healthcare, and special acquisition companies, or Spacs.
Industrials are seeing a tailwind as markets anticipate accelerated growth and infrastructure stimulus spending, she said. Exploration-and-production companies in particular are seeing enthusiasm, especially oil-field services companies. That’s because, as oil prices rise, exploration-and-production companies begin to drill again, which means revenues start to increase because they once again have customers.
(Several oil-field services companies are making the most of the rotation out of other industries and into energy by filing under a special Securities and Exchange Commission rule, 144A, which is an exemption from the typical SEC registration requirements that allows companies to sell shares more quickly.)
In technology, Myers said she expected to see a continuation of activity in software and internet. She also expects to see healthcare deals as areas like cancer therapy continue to be well-received.
While last year saw a broad mix across sectors as well, the biggest difference Myers expects to see this year is more activity in financials — in both banking and insurance.
‘A more hospitable landscape’
In terms of the broader economic backdrop, Myers laid out three reasons for the current bullishness in the markets: infrastructure spending, broader fiscal stimulus, and deregulation.
One offset might be the impact of rising interest rates, which are generally viewed by the market as more of a headwind but which will at least benefit the financial sector.
“Financial-sector issuers are seeing meaningful valuation uplifts from the expectation of better margins in a higher rate environment,” Myers said.
Another important factor: This year is unlikely to be punctuated by any significant political catalysts as last year was.
“The uncertainties around Brexit and the US election slowed new issuance momentum in certain months in 2016,” Myers said.
While the markets rebounded quickly from the Brexit vote in the UK, and US President Donald Trump’s election has been followed by a strong market run, it was the period leading up to those two events that saw IPOs getting put on hold, Myers said. Even rumors and poll numbers suggesting the possibility of a Brexit outcome in the weeks leading up to that June vote were enough for European issuers to sit on the sidelines.
“This year we see a more hospitable landscape with the absence of such catalysts and a constructive, pro-growth economic backdrop,” she said.
Investor sentiment has been strong this year, Myers said, from both mutual funds and hedge funds. They are not weighed down by concerns about performance at the beginning of the year the way they are near the end of the year.
Most active managers did not meet their benchmark indexes in 2016 and so at the end of the year were hesitant to take any risk on a higher-volatility asset class like the IPO market.
“Early in the year, investors tend to be more open-minded about new deals and can have more flexibility to take on risk,” she said.
But she said a variety of factors, not just investor demand, would be driving the IPO market in 2017. In financials, for example, it’s valuation.
“It has become more logical to monetize holdings or raise primary capital in the sector when valuations are trending back to normalized or historical levels,” she said.
In industrials, she said, “Investors are looking for ways to increase exposure to companies that could benefit from an infrastructure spending lift.”
And in technology, she said, it’s both supply and demand. Certainly, the continued demand for software and internet is helping encourage issuers to come forward. But issuers who have formerly raised capital in the private markets are now able to do so at attractive valuations in the public markets, too.
One area to watch
Myers covers IPOs around the world, and one market where her team has been active is Latin America.
“We have seen six equity offerings price in Latin America this year raising just over $3 billion,” she said. “To put the year in context — the last two years we saw $11 billion and $10 billion respectively raised — so this amounts to approximately one-third of the proceeds raised in each of the last two years.”
JPMorgan was on four of those deals.
— Dealogic (@Dealogic) February 10, 2017
Jose Cuervo and the cement company Grupo Cementos de Chihuahua priced their IPOs last week, listing on the Mexican stock exchange. JPMorgan was global coordinator for both companies.
Jose Cuervo’s $908 million deal is the largest in Mexico since October 2013, according to Ipreo Capital Markets.
In Brazil, JPMorgan was a bookrunner for the healthcare company Instituto Hermes Pardini, which also priced in February.
“There’s heightened enthusiasm around emerging markets this year,” Myers said.
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