Proceeds from the U.S. Initial Public Offerings (IPOs) slowed down in 2016, as 105 IPOs raised only $18.8 billion, which was the lowest since 2003. Median deal-size of $95 million remained below $100 million for the second consecutive year.

According to Renaissance Capital, the primary factors that impacted the IPO market in terms of deal flow as well as proceeds were lack of major technology IPOs, Brexit and volatility related to the U.S. Presidential elections.

Meanwhile, four IPOs raised over $1 billion, up from three in 2015. However, the top ten largest IPOs raised 17% less in collective proceeds compared with 2015. Chinese logistics company ZTO Express (ZTO Quick QuoteZTO - Free Report) with deal size of $1.41 billion was the largest U.S. IPO of the year.

Although proceeds declined, IPO returns rebounded in 2016. Average IPO was up 23% from its offer-price as compared with a decline of 2.1% in 2015. At the end of 2016, 70.2% of IPOs traded above the offer price, compared to 43% at the end of 2015. The strong returns reflected appropriate pricing of the IPOs.

Top Three Sectors Contributed 75% Proceeds

Medical & Healthcare was the most active sector in 2016, as 42 IPOs contributed roughly 40% of the proceeds. Notable IPOs were gene-therapy company AveXis and drug developer Novan , which were the second and third best performing IPOs, with returns of 159.7% and 143.3% (since IPO date), respectively.
 

Number of technology IPOs fell to 21 from 24 in 2015. However, the sector contributed almost 20% of the total proceeds and was also the best performer, with IPOs gaining 39.8% (til Dec 15). Acacia Communications , a Zacks Rank #1 (Strong Buy) stock, was the best performing U.S. IPO with gains of 191.8% since its debut on May 12 (data as of Dec 15). You can see the complete list of today’s Zacks #1 Rank stocks here.
 

Financial sector with 15 IPOs contributed to around 14% of the proceeds. Insurer Athene Holding and casino-owner MGM Growth Properties LLC with deal size of $1.08 billion and $1.05 billion, respectively, were the second and third largest U.S. IPOs of 2016.

Notably, healthcare company PhaseRx was the worst performing IPO in the year, with the stock declining 71.4% since its debut on May 17.
 

PE & VC-backed Companies Avoided IPOs

Lofty valuations particularly of the technology stocks have been a bone of contention between private equity (PE) & venture capitalists (VC) and the public market during an IPO. Notably, this trend was clearly manifested in 2016 as many PE and VC-backed companies avoided the public space.

As stated by the Renaissance Capital “VC-backed tech companies chose to avoid public-market valuations and had the luxury of remaining private due to ample cash.”

Per Dealogic, 58 issuers withdrew their IPOs (as of Dec 19), many of which were probably PE & VC-backed. These issuers were anticipated to raise almost $10.1 billion, 71% more than last year and the highest since 2013 (42 deals, $10.5 billion).

The decline in private equity backed IPOs, down from 39 in 2015 to 31 in 2016, sums up the mood of the market. PE-backed proceeds totaled $8.8 billion, significantly below $11.3 billion recorded in 2015.

VC-backed IPOs fell to the lowest level since 2009. Per data from Renaissance Capital, 42 VC-backed companies (roughly 50% biotech) debuted last year and raised $3.5 billion in proceeds. Average returns were 40%, down from 50% posted in 2015.

Will a Rebound Happen in 2017?

The IPO market is anticipated to revive in 2017 as volatility over the U.S. Presidential election and Fed’s interest rate hike subsides. President-elect Donald Trump’s promised policies to stimulate the U.S. economy through infrastructure spending as well as regulatory and tax reforms is expected to encourage investors on IPOs.

Overhauling of the corporate tax structure – lowering of tax rate from 35% to 15% – as proposed by the President-elect during his campaign days, will be beneficial to small and mid-cap companies. This will surely attract IPOs in that market segment.

Moreover, slowing PE & VC investments (particularly late-stage financing) will compel private companies to seek public money in order to survive and run their businesses. This will boost deal flow in 2017.

However, we believe that investors will favor companies with strong fundamentals that support their business models. While lofty valuations will most likely be ignored, we believe that investors will pour money into well-known companies like Snap Inc. (parent of Snapchat), Uber Technologies and Dropbox, which need not be profitable but at least have a clear visible growth trajectory in the long haul.

However, continuing slowdown in China’s economy, volatility in oil price movements, after-effects of Brexit (formal proceedings to leave European Union to begin by the end of March) and uncertainty over Trump’s immigration and foreign policy are some of the headwinds that will keep the investors on tenterhooks. These headwinds can negatively impact IPO market in 2017.

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