IPO market activity picked up in the fourth quarter, driven by favorable market fundamentals that appear in place as 2018 approaches. The positive backdrop for IPOs even brought out a few Unicorns last quarter, and more are waiting in the wings.
Overall in 4Q17, 68 companies (including blank check and closed-end funds) went public, double the amount in the same quarter a year earlier and up more than 60% compared to the 42 companies that were launched in 2Q17. Meanwhile, secondary issuance was up 12% quarter to quarter and 2% year over year.
The U.S. equity markets were characterized by low volatility through most of the quarter, this as the economy advanced at a 3% rate, investors anticipated benefits from the proposed tax reform plans and interest rates remained low on an historical basis. During the quarter, the S&P 500 set numerous record highs. In the background, corporate earnings grew for the fifth quarter in a row and appear poised to expand at a double-digit pace into 2019.
Investors able to purchase IPOs at the issue price fared well last quarter. We estimate that the ratio of IPOs that opened at prices above the issue price compared to IPOs that opened at or below the issue price was approximately 2.5:1. Quarter to quarter, the ratio improved. In 3Q, the ratio was approximately 2:1. In 2Q, the ratio was approximately 3:1, and in 1Q the ratio was approximately 4:1.
From an industry perspective, IPO activity was consistent quarter over quarter. The top three sectors once again were Healthcare, Finance and Technology.
From a performance perspective, the IT sector stood out.
All three companies were Unicorns, or formerly private companies with valuations above the $1 billion level. Mongo DB raised $192 million and is now valued at $1.4 billion. Forescout Technologies raised $116 million and is now valued at $1.2 billion. Cargurus raised $150 million and is valued at $3.1 billion.
For the secondaries on a sector basis, the trend was similar. Healthcare led, followed by Technology and Finance.
Looking ahead, we think the market for IPOs is likely to remain bullish into 2018. On the positive side, economic growth, led by the employment environment, appears to be accelerating; volatility remains low on an historical basis; and corporate earnings growth is expected to grow at double-digit rate, as the dollar stabilizes, oil prices continue to recover and tax rates decline.
The IPO pipeline remains robust, with about 180 companies having filed with the SEC and a number of interesting recent filings, such as AXA Equitable Holdings, which owns the namesake insurance company as well as AllianceBernstein; Workplace Property Trust, which is focused on office and flex real estate in U.S. suburbs; and VICI properties, which owns real estate assets in the gaming industry. We look for more biotech, clean tech, medtech and transportation companies to file with the SEC in the weeks ahead.
In the tables on the following pages, we highlight select companies that our team of analysts thinks may be poised to enter the IPO markets at potentially attractive prices.
Unicorn sightings have been fairly rare in the IPO markets, though four emerged in the second half (Cargurus, MongoDB, Forescout Technologies and Roku Inc.). On average, these stocks opened 38% above their offering prices, and closed on their first day of trading 47% above their offering prices. This type of performance may well entice other Unicorns to move toward the IPO market in the quarters ahead. Airbnb and Spotify top the lists of most likely candidates, though Spotify may look to elude investment bankers and list directly on the NYSE.
John Eade, President, Argus Research
Jasper Hellweg, Security Analyst
Table 1 features the Argus Top 30 Promising Potential IPO candidates. This list has been selected from companies that have already filed S-1s with the SEC. The list is based on factors that Argus believes are important for success in an IPO, including solid sales and earnings growth, a clean balance sheet, brand names, attractive industries and current management/ownership. Two of the companies that were on the Argus Top 30 list last quarter (Rhythm Pharmaceuticals and Loma Negra Corp.) completed IPOs in 3Q. Rhythm's opening versus issue gain was 37%, while Loma's was 14%.
Source: Triad Securities, US SEC, Argus Research
Table 2 is our Top 40 Intriguing Venture-Backed Private Companies, including the so-called Unicorns such as Uber and Airbnb. This list includes companies in emerging industries such as Cybersecurity and Big Data analytics, as well as companies whose investors include well-known groups such as Kleiner Perkins and Andreessen Horowitz.
Source: www.sharespost.com; The Billion Dollar Start-up Club; www.techcrunch.com; Argus Research.
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