Though fourth-quarter volatility disrupted strong equity markets in 2018, many equity capital markets and syndicate bankers across Wall Street believe 2019 could be another robust year for IPOs, as issuers look to take advantage of a U.S. economy that remains strong ahead of the anticipated next economic cycle. However, Wall Street is continuing to digest ongoing volatility and parse the uncertain political and economic landscape. As a result, first-quarter issuance is expected to be muted (exacerbated by the longest government shutdown in U.S. history, which has delayed the lineup of IPOs slated for January 2019 launches) before a potential recovery for the remainder of the year. Several tech unicorns, including Airbnb, Lyft and Uber, have announced plans to go public in 2019, and the pipeline in a number of industry verticals remains strong. However, if volatility persists longer than anticipated, it could push some issuers toward quicker and more certain exits through mergers and acquisitions. Equity professionals will watch market sentiment closely, particularly the appetite of hedge funds to buy new issuances, as many funds suffered negative returns in 2018.
After a very good year for technology offerings in 2018, with 48 IPOs compared to 26 in 2017, many anticipate the momentum to continue, as companies feel increasing pressure to hit available market windows. Significant activity is expected from high-growth software and internet and e-commerce companies that have high revenue visibility and large addressable markets. Additionally, a number of deals by technology services companies (which help businesses utilize and adapt to new technologies) are possible; however, activity by systems and semiconductor companies is likely to remain subdued. Chinese and other offshore issuers continue to make up a significant portion of the IPO backlog, but recent mixed aftermarket performances could soften demand.
Continued IPO deal flow by biotech and life sciences companies, as well as a number of public debuts by medical technology (medtech) and device companies, meant 2018 was another strong year for the health care sector. Heading into 2019, the deal pipeline remains robust, although for biotech companies it appears smaller than in past years. On the other hand, significant follow-on activity is expected by recently public biotech issuers, and a number of private biotech companies appear to be exploring “crossover” financing rounds to bridge to an IPO, thereby potentially replenishing the pipeline. Meanwhile, a number of medtech, health services and specialty pharmaceutical issuers are reportedly exploring IPOs, although for the latter, heightened political scrutiny around drug pricing could derail issuance activity. (See “Trump Policy Actions Could Reshape Health Care and Life Sciences Landscape.”) The trend toward increasing levels of “insider participation” in IPOs (whereby existing investors disclose nonbinding indications of interest to buy shares in the offering) is expected to continue.
Offering activity in the industrials sector slowed in 2018, and the trend is expected to continue in 2019, driven largely by skepticism toward issuers tied to the construction, manufacturing or housing industries, which can be more sensitive to economic downturns, and by continued trade uncertainty. These companies instead may shift focus to capital management strategies, which could lead to an uptick in stock buyback activity and recapitalization transactions. However, as with 2018, M&A activity may drive sporadic equity issuances across the sector. One potential bright spot remains in the automotive technology sector, with a number of companies — both domestic and foreign — that offer solutions for electronic or autonomous vehicles securing late-stage private funding and appearing poised to pursue IPOs.
Issuances by financial institutions in 2018 were solid, driven by rising interest rates, the impact of corporate tax cuts and deregulation. Sentiment for 2019, however, is mixed, with cautious optimism if recent volatility subsides, while recognizing that the economy may be in a late cycle and offering windows could close. The financial technology sector continues to be attractive — particularly the payments processing space, where valuations remain elevated. The market also looks attractive for midcap property and casualty insurers, as the subsector has outperformed broader market indices. The outlook for regional banks, which suffered significant valuation degradation in 2018, and consumer finance companies, particularly those exposed to subprime borrowers, is less optimistic. All eyes will be on Federal Reserve activity and whether rate hikes will continue and, if so, at what pace.
Despite a better-than-expected year for consumer equity offerings in 2018 and a strong macroeconomic outlook for U.S. consumers, expectations for 2019 are modest, particularly given the sell-off in retail names in the fourth quarter of 2018. However, despite a reset in valuations, cautious optimism exists for new issuances in the general retail and consumer discretionary sectors, with several sponsor-backed companies potentially eyeing public market exits. Conversely, significant issuance activity in the restaurant and specialty retail areas is less likely. As in past years, technology-oriented consumer companies (companies selling consumer goods through online or subscription models) continue to generate significant attention, but many are still pursuing midstage private funding rounds and need to prove their ability to grow revenues or diversify product and service offerings before testing the public markets.
Real estate issuance in 2018 remained solid, despite market volatility and a challenging fourth quarter. Real estate investment trusts (REITs) led the way, accounting for over half of the total issuance, followed by lodging, gaming and real estate services companies. In the year ahead, investors may look to the real estate sector, and REITs in particular, as a defensive sector that can provide more stable returns in a rising interest rate environment. With funds continuing to pressure managers to be more selective in allocating capital, issuances from REITs with active growth opportunities through either acquisitions or developments likely will continue to garner investor attention and drive equity issuance. The alternative real estate sector (such as retirement living, student housing and private hospitals) also may see increased activity, as real estate investors seek ways to generate higher returns relative to the broader REIT universe.
High expectations in 2018 for capital markets activity in the energy sector turned out to be largely misplaced. U.S. crude oil prices reached $75 a barrel in July 2018 (their highest level since 2014) before dropping sharply, ending the year at around $54 a barrel. Volatility in oil prices and concerns about slowing economic growth and an oversupplied oil market are likely to continue, causing uncertainty in the new issuance market. Some still see potential for deals driven by M&A financing needs, particularly in the exploration and production space, while others view dividend-yielding stocks in the upstream and midstream sectors as an attractive place for investors to put money to work. While there is a substantial deal backlog in the oilfield services space (some of the pent-up supply began to emerge in 2018, but not at anticipated levels), volatile oil prices could suppress activity.