EY Global IPO Trends

US sees strong start

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The US IPO market is booming. Improving economic fundamentals, resurgent investor confidence, capital market strength and tapering of quantitative easing – which has re-focused investors on developed market opportunities – is creating something of a perfect storm.

Financial sponsors take advantage of open window

The combination of attractive valuations and solid after-market performance means financial sponsors are seizing the opportunity to exit aging investments. They accounted for 9 of the top ten deals in the US in 2014 Q1, 89% of deals with IPO proceeds above US$100m and 72% of deals overall as PE and VC funds continued to clear the backlog of older companies and return results for limited partners.

Cross-border listings make a come-back

The US continues to attract IPOs from around the world as companies seek to ride the momentum of US capital markets. There were 11 foreign listings which raised US$1.9b in 2014 Q1, which accounted for 16% of US IPO number and by deal value. We expect to see higher number of cross-border IPOs in the remainder of 2014 from China, Europe and rest of the world.

Appetite for innovation and risk returns

Rising confidence means investors are becoming more daring – favoring the more innovative companies that offer higher risks and higher returns. For example, January alone saw three energy companies come to market that specialize in unconventional energy assets including the extraction of shale gas.

The most active sector by deal number in 2014 Q1 is health care, which accounted for 51% of US IPOs (35 IPOs, US$2.2b). Pharmaceutical was the most active sub-sector accounting for 23 of the 35 IPOs (raising US$1.6b). Biotech followed with seven deals raising US$266m and medical equipment with 5 deals raising US$272m.

Technology investments will gather pace in 2014 Q2 with more offerings from disruptive, innovative businesses that blur the boundaries between technology and other sectors. As a result, companies move away from traditional sector categorization in an effort to maximize valuation as they come to the market.

Pipeline is strong and prospects are good

With the VIX index consistently below 20, the S&P 500 trading at around 16 times 2014 reported earnings and around 75% of companies achieving solid after-market performance, investor appetite is likely to remain firm. The pipeline is strong with new registrations up 124% on 2013 Q1.

We anticipate continued momentum for health care and disruptive tech companies including cloud, SaaS, big data and social media – particularly those which offer revenue streams alongside advertising. The market will continue to be dominated by more offerings with smaller deal size (US$100m or lower in expected proceeds) while confidence rebuilds.

A number of billion dollar-plus deals, such as the listing of Chinese e-commerce companies, Alibaba and JD.com, are also anticipated during 2014.

EY - US Infographics

EY - US Infographics

PE driving UK IPO market

Forty-two percent of UK IPOs were PE- or VC-backed in 2014 Q1 and we believe PE and VC will continue to be a major market participant in 2014. EY’s Global private equity watch 2014 report shows that there are a significant number of UK companies that have been under PE ownership for over four years (the typical hold time).

Continued PE exits via IPO will be driven by a combination of need and opportunity. As major shareholders in many recent IPOs, PE sponsors have received a significant uptick in value from post-IPO trading and will want to perpetuate the trend in 2014 while the IPO window is open.

Outlook for the second half is good

2014 Q2 is expected to be one of the strongest quarters for the UK since the start of the global financial crisis. We anticipate businesses from a broad range of sectors to come to market that will be predominantly UK-based and PE-backed. In particular, natural resources IPOs may feature more strongly following a dry run in recent times and there are signs that in-bound, cross-border listings are starting to pick up.

We may also see more large deals, potentially from the financial services sector.