Based on the views of equity capital markets and syndicate bankers across Wall Street, 2018 holds the promise of a strong year for equity issuances across many sectors. Technology will continue to be viewed as a key bellwether for the IPO market. While a number of the tech unicorns, including Airbnb, Dropbox and Lyft, are possible 2018 IPO candidates, others may continue to sit on the sidelines, rather than accept a potential “down round” relative to lofty valuations achieved in the private markets, not to mention hefty discounts investors demand to compensate for the risk of an IPO investment.
Another indicator for the IPO market is the extent to which private equity sponsor-backed issuers will come to market. Sponsors have used strong cash positions to continue replenishing their pipeline, and sustained favorable market conditions combined with attractive public market valuations may entice them to begin monetizing these assets through the public markets in 2018.
Many experts anticipate smaller to medium-sized issuers to dominate the tech IPO calendar, although several deals by unicorns are also likely. Much of the activity is expected to come from high-growth software companies and internet and e-commerce businesses, with possible issuances by a number of technology services companies. Chinese and other offshore issuers continue to make up a significant portion of the potential IPO backlog, but some equity capital markets professionals question whether the mixed performance by the 2017 IPO class will impact such issuances. Follow-on activity is expected to be robust, as venture capitalists look to exit positions.
Driven largely by life sciences, health care issuances were up over 55 percent in 2017 by proceeds raised, and all signs point to the sector once again being active in 2018. Life sciences issuers are expected to continue accessing equity capital to fund research and development and pipeline growth, while pharmaceuticals, services and facilities issuers are expected to benefit from the new tax law. The biotech IPO pipeline remains strong, with a number of issuances on the near-term deal calendar.
The new tax law could have a particularly catalyzing impact in this sector, as many issuers carrying heavy tax burdens will see meaningful tax savings and benefit from the provision allowing immediate expensing of capital purchases. Areas to watch include companies sitting at the intersection of the technology and industrial sectors (particularly those that serve the automotive industry) and companies in the building products space, depending on the pace of interest rate rises and any impact of the new tax law on home construction and sales.
Equity issuance in the sector was up in 2017, and with interest rates rising and regulations being relaxed, conditions appear favorable for the year ahead, with a number of insurance and business development company IPOs in the nearer-term pipeline. All eyes will be on Fed activity, with two to four rate hikes expected in 2018.
Despite a few notable IPOs (Canada Goose and Laureate Education), 2017 was a fairly quiet year in the consumer space. Although Apollo-backed home security company ADT recently launched its highly anticipated $2 billion IPO, 2018 may continue to see relatively few issuances. Amazon’s continued disruption of the way consumers shop makes it a challenging environment for traditional brick-and-mortar retailers, with possible bright spots for discount retailers and companies tied to the home improvement space.
The real estate equity capital markets are expected to see another active year in 2018 and subsectors with continued strong fundamental tailwinds (data centers, industrial real estate investment trusts (REITs), gaming, and single- and multi-family REITs) are likely to be strong. A number of sizable IPOs are expected in the early part of the year, while emerging small and midcap REITs may be appealing to institutional investors. At-the-market offerings, which reached record levels in 2017, are expected to continue to be a popular funding tool.
Industry observers expect much of the capital markets activity in the energy space to come in the form of financing M&A activity, as a crowded exploration and production (E&P) field appears ripe for consolidation. Despite a recent proposal from the Trump administration to open up offshore drilling around U.S. waters, market experts are skeptical that this will translate into renewed investor appetite for E&P IPOs, as offshore drilling ventures remain costly and largely dependent on crude oil prices. On the other hand, a substantial backlog in the oilfield services space could come to market, particularly if issuers are willing to accept valuation discounts. (As of the date of this publication, two oilfield services IPOs have priced in January 2018).
SPAC issuance hit an all-time high in 2017, and a great deal of attention was paid to the Social Capital Hedosophia offering, a vehicle designed for the purpose of acquiring a technology unicorn. However, while SPAC issuance is expected to remain strong in 2018, many question whether the 2017 pace is sustainable, given the glut of recent issuance and a desire for issuers to demonstrate an ability to complete the back end of the process — that is, successfully acquire an operating company.
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