Corporate Financing Analysis - Tech Unicorns To Outperform During US IPO Slowdown - 17 APR 2017


With share valuations elevated substantially, the US IPO rally is highly unlikely to be sustainable over the medium-to-long term. The projected slump in new share issues over the coming quarters is, however, unlikely to stop equity capital market (ecm) investor interest in unicorn floats from remaining high across the remainder of the year. The tech sector has been at the centre of the uptick in listing activity in the US so far this year. Renaissance Capital data show that tech floats have made up a 21% share of the market by deal value during Q117, with only the healthcare industry commanding a larger share of the market (29%). Moreover, due to the industry's high-growth prospects we are predicting that it will likely fare comparatively well going forward too amid the slowdown in broader lPO activity that we are predicting over the coming quarters and beyond the end of H117 ( see ' US IPO Rally Facing Plenty Of Downside ' , March 29 2017 ). Our view that the tech industry, led by unicorns (start-ups with a valuation of USD1bn or more), will outperform going forward is based on several facts. First, the industry has, after a quiet spell in 2016, provided a slew of successful deals across the first-quarter. Second, the tech industry provides investors with potentially high returns - a real draw in what continues to be a low yield environment. Third, the industry has provided plenty of floats which have performed well on their debuts, and in the enduring aftermarket - a key measure of ecm investor interest in such deals. To temper such positive sentiment, however, we acknowledge that the tech industry and the unicorns more specifically will not be immune to the downturn in broader listing activity forecast across the reminder of 2017 and declining deal sentiment will certainty weigh on the volume of deals which are able to successfully come to market and tap ecm investors for fresh cash going forward. Despite this, we still expect the unicorns to outperform.

The Bear Market

All the signs are pointing to a dip in US equities and consequently to a slowdown in local IPO activity over the coming months. Indeed, with share prices already at an all-time high and with the market's bull run built on less than stable ground, we do not believe that the wave of new listings that the US arena has witnessed across Q117 will continue beyond the end of the second quarter. According to Bloomberg data, the position of the benchmark S&P 500 index on April 11 is up by 17.76% y-o-y and by 5.13% since the turn of the year. At such a peak, the downside risk for the index is building. Moreover, the technicals are all pointing to a near-term downturn in sentiment which signals that we are reaching a broader market shift which is usually a time when investors typically become nervous and deals start being withdrawn ( see 'US ECM Rally Soon To Hit Road Bumps ' , February 1 2017). A thinning out of the US IPO pipeline certainly supports this view. According to Renaissance Capital data, Q117 ended with as few as just 68 firms waiting in line to list and hoping to raise a combined USD18bn. We note that the high volume of withdrawals (16) seen across the first quarter were a contributing factor to this ( see ' Withdrawn Floats Back On The Radar ' , March 1 2017). Meanwhile, the numbers for the 'active pipeline' - those firms that have joined since the turn of the year - make for an even more downbeat reading, with only 38 having filed with the Securities and Exchange Commission (SEC), down 10% from the end of the first quarter last year.

Tech In Second Spot
US - 2017 To-Date IPO Activity By Industry Sector Market Share, %
Source: www.renaissancecapital.com

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