When historians look back on the year just ended, they will no doubt write about it as the year of the unexpected.
Beginning with a downshift in China’s seemingly unstoppable economy, the year progressed to the stunningly unexpected Brexit vote and the equally improbable election of Donald Trump. Intuitively, unexpected events like these should be bad news for the IPO market.
Yet, with the year of the unexpected now behind us, the conditions for a strong IPO market have, somehow, fallen precisely into place. This New Year could be quite a good one, after all.
To understand how such an improbable year could yield a bullish outlook, it’s important to look at the data pointing to a strong 2017. Equally fascinating however, is an exploration of the events and conditions that have led to this outlook, and these comprise three key areas: the political environment – Trump – critical similarities with the Nordic region, which saw near-record listings activity last year, and the needs and aspirations of pre-IPO enterprises.
Those who work in and around IPOs know the conditions necessary for new issues to come to market include low volatility and strong valuations. Investors shy away from investing in new issues in markets where direction changes from day to day. To gauge this, we typically look at the CBOE Volatility Index, or VIX, which measures expected near-term volatility.
The VIX currently stands at 10.58, hovering near its 52-week low of 10.53. Historically, levels below 20 correlate with a positive IPO environment. We have entered 2017 well below that. In fact, the VIX has not climbed above 15 since Election Day, Nov. 8. In contrast, in January 2016 the VIX reached a high of more than 27, well exceeding the critical threshold of 20.
Further, the key equity market indexes breached all-time highs in December, with the S&P 500 up 5% and the Nasdaq Composite rising 4% since Election Day. This has been such a stunning move that market commentators have dubbed it the Trump Rally.
Indeed, the biggest event to hit financial markets in recent months by far has been the election. It is clear that the market is taking stock of a Trump presidency and liked what it saw leading up to January 20 th . This should not be a terrible surprise, as a great deal of Trump’s campaign rhetoric dealt with stimulating economic growth. A quick glance at his pre-election speech to the New York Economic Club illustrates this:
- On taxes: “By lowering rates, streamlining deductions, and simplifying the process, we will add millions of new jobs.”
- On regulation: “I’ve proposed a moratorium on new federal regulations that are not compelled by Congress or public safety, and I will eliminate all needless and job-killing regulations now on the books.”
Interestingly, the pro-growth Trump agenda has generated significant enthusiasm not just among the market participants generally but the pre-IPO companies we speak with every day. To put it colloquially, there is a good vibe in the marketplace.
Our experience in the Nordic region may provide some additional context for how such a vibe can be transformed into performance. We have had an impressive year for IPOs on our Nordic exchanges, seeing IPO volume there surpassing that of the London Stock Exchange. Nordic new listings totaled 94 in 2016, including 61 IPOs and just a hair behind 2015’s record year. We must assume the efforts of Nordic countries to stimulate economic growth – as our President has pledged to do – has been a key driver.
The Nordic countries have demonstrated support for their capital markets and growth dating back to the Swedish pension system reform in the 1990s, when Swedes were given the freedom to invest part of their pension capital. The Swedish ISK, a special investment savings account, was introduced by the government in 2012, allowing investors to pay only a small percentage of their total portfolio value in an annual tax as opposed to taxing capital gains.
Today, more than 80% of Swedes own equity in some form. Indeed, the new Forbes listing of the Top Countries for Business in 2016 ranked four of the Nordic countries among its Top 10, including Sweden as No. 1. Denmark came in at No. 6, Finland No. 8 and Norway No. 9. Where did the United States rank on the list? No. 23.
Finally, it’s important to consider where private companies are right now in terms of capital. Given the slower overall pace of U.S. IPOs last year, there is pent-up demand. Many private companies raised significant capital during the past two years. Yet, these organizations, unicorns and other disruptive companies in technology and health care, need continuous sources of capital to fund their new products, services and drive groundbreaking innovation.
IPOs satisfy this need and also give these companies a currency for acquisitions and future capital raises. The technology space has seen a fair amount of M&A activity this year, which further supports their valuations. Under these circumstances, such companies almost certainly will look to raise funds this year or next.
Private companies also rely on IPOs as a source of liquidity for their employees and investors. Our Nasdaq Private Market facilitated over $1 billion in secondary transactions last year, with current employees accounting for more than 70% of the eligible sellers. For the buyers of these shares to see a return on their investments, these high growth companies will need to pursue public listings, so the number and scale of these private transactions can be seen as an indicator of future IPO activity.
Every industry segment, of course, has its own set of puts and takes. Biotechs, for example, have had a wild ride. Surging initially on expectations that less regulation would benefit them, the sector then fell sharply on a Trump comment about bringing down drug prices. There’s also been some concern in the technology sector about how Trump policies might impact H-1B foreign workers, important for Silicon Valley amid a tight market for STEM talent.
Overall, however, the market is telling us it is bullish on Trump and that, in turn, is creating conditions that are bullish for IPOs. It will no doubt be a very interesting year around the opening bell.
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