JPMorgan’s head of global equity capital markets, Liz Myers, can name a bunch of reasons why 2017 could see a strong rebound in initial public offering, or IPO, 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, she said a typical year would see 50% to 100% more than that. 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.”
So far 12 deals have priced in the US.
Myers walked through a number of 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.
Of the companies that did go public in 2016, more than 70% are trading up right now, according to Myers. 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 capitalists backers, that offers the chance to sell down their stakes.
Also, of the nine deals that priced in January of 2017, two have priced above their ranges and two priced at the top of their ranges. Of course there were no IPOs in January in 2016 to compare with, but in the whole first quarter of 2016, two of the six IPOs to price were below range, Myers said.
Although only nine deals priced in January, the breadth of sectors they fall 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 the oil price rises, exploration and production, or E&P, 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 the 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 expects 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 — both in 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 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 won’t likely be punctuated by any significant political catalysts like 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 Brexit, and Trump’s election was directly 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 rumours and poll numbers suggesting the possibility of a Brexit outcome in the weeks leading up to that June 2016 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 so far in 2017, Myers said, both from mutual funds and hedge funds. They are not weighed down by concerns about performance at the beginning of the year like they are near the end of the year.
In 2016, the majority of active managers did not meet their benchmark indices, 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 there are a variety of factors driving the IPO market in 2017, not just investor demand.
In financials, for example, it’s valuation.
“It has become more logical to monetise 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 her team has been active in 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.
Jose Cuervo and the cement company Grupo Cementos de Chihuahua both priced their IPOs last week, listing on the Mexican stock exchange. JPMorgan was a bookrunner 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 the book runner 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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