Back to School: Sponsors looking to cash out fuel IPO activity

First-quarter IPO activity shows private equity sponsors will remain steady participants in the public markets as underlying drivers enable an attractive means to liquidity. “Private equity is a real solid engine we didn’t have in 2016,” David Ethridge, PwC’s IPO Services leader, said in an interview with Buyouts.

Q1 2017 saw just 27 U.S. IPOs, or 22 excluding special-purpose acquisition companies, marking the second slowest quarter in the past six years. But participation of financial-sponsor-backed deals accelerated, a PwC report shows.

Of the 22 non-SPAC public debuts, 12 were backed by financial sponsors, the firm’s analysis says. In contrast, PE’s percentage of the total IPO market typically accounts for about 30 percent annually, said Ethridge, who expects that percentage to normalize as the year proceeds.

An unusual dip in biotech IPO activity — a sector that typically accounts for 30 percent to 40 percent of the overall IPO market — skewed the results, he explained. Only three biotech companies debuted in Q1 as opposed to eight in the year-earlier period.

Regardless, a strong debt market, a cooperative Fed — in the sense that plans have been communicated — and a low level of angst with respect to major macro events ought to continue to propel PE-backed IPO activity across most industries, Ethridge said.

“You can’t get too negative about the multiples we’re seeing in the [public] markets,” he said. “A lot of things are pointing in the right direction for PE to continue to bring companies to market.”

In contrast, 2016 included an out-of-sync high-yield market in the first quarter; Brexit in Q2; and the U.S. presidential election in the second half. Those factors likely caused PE to sit out in 2016, ultimately creating pent-up demand toward the end of the year and start of 2017, Ethridge said.

PwC’s findings align with Buyouts’ quarterly analysis, which found an uptick in PE-backed IPO activity and a spike in total value of public offerings. The value over the first three months of the year climbed to $3.1 billion from Q4’s $2 billion, representing the biggest aggregate value since Q4 2015’s $3.2 billion.

From an industry perspective, retail and consumer and oil-and-gas companies led the pack in PE-backed IPOs in Q1, PwC analysis shows. In energy, that includes Energy Capital PartnersProPetro and Quantum Energy PartnersJagged Peak Energy, while retail IPO activity included TowerBrook Capital’s J. Jill and Bain Capital’s Canada Goose.

While optimistic from a PE perspective, Ethridge said the real question is whether the broader IPO market will have a strong year. To make up for the slow start to the year, Q2 needs to produce around 75 IPOs, and the subsequent two quarters need to be as strong or close to as strong, he said.

Action Item: View the full PwC Q1 IPO report here: http://pwc.to/2nIJ1Co

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