Will the U.S IPO market surge or sag in 2019?
As 2019 gets rolling amid a backdrop of rebounding equity markets and continued geo-political sturm und drang we thought it would be a good time to ask Societe Generale’s head of U.S. Equity Capital Markets David Getzler what he expects to see impacting U.S. stock issuance in the year ahead.
There’s been a lot of volatility, both market and political, as we’ve begun the year. How do you see Equity Capital Markets activity in the U.S. shaping up in 2019?
Equity Capital Markets (ECM) activity is heavily influenced by the state of the underlying equity markets. Case in point, looking at 2018, there was a 50% drop-off in the pace of ECM volume in Q4 compared to the Q1-Q3 quarterly average, as equity markets sold off sharply in Q4.
So, the key guide for 2019 ECM activity will be the performance of underlying equity markets, and there the news from the first few weeks of 2019 has been quite encouraging. There has been a bounce-back in U.S. equities as we continue to see positive news on the domestic economy, as well as optimism that there will be some form of resolution to the U.S.-China trade dispute.
Looking at potential issuance, there is a large pipeline of IPOs that are getting readied for a launch in the first half of 2019. While there has been a lot of media discussion about Uber and Lyft’s potential IPOs, there is a slate of other companies planning to IPO. This includes tech companies, but also names such as Peloton and Levi Strauss.
Explain why market volatility is not good for IPOs?
Market volatility has a big negative impact on IPO plans. The typical IPO is on its roadshow for at least a week so in a volatile market there can be big swings in sentiment towards a company and in its valuation. In addition, in times of heightened volatility, investors seek out the more liquid and larger-cap stocks, whereas most IPOs are for smaller-cap names and the initial liquidity is quite low as the owners may only float 10-20% of the company’s stock.
To provide some context, based on Bloomberg data our Bank’s analytics team calculated the stock price volatility of each of the 68 companies in the S&P 500 Technology Sector over the past year; and the average for that group rose from 21.5% at end-2017 to 37.1% at end-2018.
I would point out that market and individual stock volatility is generally a positive for the convertible market, as there is an increase in the ‘option value’ of a convertible with higher volatility.
Looking at other factors that could influence the market this year, is the US govt shutdown having any negative impact as the year gets going?
Clearly the shut-down is directly impacting the work of the SEC; which is causing a significant slow-down in their review process of IPO filings. In addition, it adds an additional note of uncertainty to the currently volatile and unpredictable market environment.
Given all the challenges as we start the year, what kinds of companies do you think will be most actively tapping the equity markets?
Technology and biotech are traditionally the most active sectors for IPO activity; and last year accounted for 60% by dollar amount and 65% by number of deals of all IPO issuance. There is clearly a large pipeline of tech IPOs gearing up for 2019. At the same time, there are a number of companies across fintech, consumer, energy sector all positioning to be ready to go public.
One increasing trend I saw in 2018 was the large number of Chinese companies, especially in the tech sector, that executed their IPOs in the U.S. with a primary listing on the NYSE or Nasdaq. The most high-profile Chinese IPO was Tencent Music’s $1.1 billion IPO in December.
There’s been a lot of attention paid to green bonds. How does a company’s greenness factor into the equity capital markets?
If one looks just at equity pools of capital, ‘Greenness’ is a more significant factor in Europe than the U.S. In Europe, the Sustainable and Responsible Investment (SRI) and Environmental, Social and Governance (ESG) asset classes have been the fastest growing among equity assets over the past five years.
Where I have seen environmental and social considerations become a very important factor for the U.S. companies is in the Risk Factors disclosure section of prospectuses and public filings. Companies now detail the potential impact on their business of, for example, climate change and how the company is mitigating these potential effects.
Societe Generale typically includes environmental considerations as part of its due diligence for equity offerings, and I believe that investors are taking such issues into consideration when making investment decisions.
Is the US market for IPOs different from the European or Asian markets?
The biggest difference between the markets is the larger amount of equity assets in the U.S. compared to the other two regions. The U.S. represents around 50% of global assets under management, compared to 30% for Europe and 20% for Asia. Thus, there is more capital to invest in U.S. IPOs.
At the same time, the IPO market is becoming very global, with converging accounting standards, and regulatory and governance requirements. When I talk to companies in Asia and Europe, they will evaluate listing in the U.S. as one alternative path for their IPO. I see this same trend on the investor side, where all the major global institutions such as Blackrock and Fidelity have large teams in the major financial markets, and they will invest in IPOs across all markets.
What’s the #1 thing you tell clients when you advise them on executing a successful equity issuance?
- Raise equity when you can and while markets are receptive, and not when you have to.
- Don’t try to squeeze the last penny out of pricing a deal. You want your new investors to make some money and feel good about having subscribed to your offering; as you most likely will be going back at some point to the well to raise additional capital.
Unless otherwise stated, any views or opinions expressed herein are solely those of David Getzler and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale (“SG”) and its affiliates. No part of David Getzler’s compensation was, is or will be related, directly or indirectly to the specific views expressed herein. This material is provided for information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The information contained herein has been obtained from, and is based upon, sources believed to be reliable, but SG and its affiliates make no representation as to its accuracy and completeness. The views and opinions contained herein are those of the author of this material as of the date of this material and are subject to change without notice. Neither David Getzler nor SG has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein.
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