2020 Global Equity Capital Markets Outlook

We had a conversation with David Getzler, head of Equity Capital Markets for Societe Generale Americas, in which he identifies some of the interesting market trends of 2019 and looks at what may have an impact on the ECM and IPO markets in 2020.

Global equity markets were up over 20% last year, with a number of major indices hitting record highs.  How did the market’s rise impact IPO and ECM activity in regions around the world?

That’s right, we saw a rebound in 2019 across all major equity markets driven by the twin dynamics of an accommodative monetary policy that was coordinated by the major central banks, and ongoing resilience of the U.S. economy which more than offset minimal growth in Europe and a slowing Chinese economy.

At the same time, equity investors were, for the most part, taking the position that a lot of the jostling between China and the U.S. on trade was for domestic political consumption, and that the two countries would eventually reach an agreement, albeit a drawn out one with ups-and-downs along the way.

 
Source: Bloomberg as of 01/31/2020

And for the U.S. IPO market in particular, what interesting trends caught your eye?

On the IPO side, issuance volumes in 2019 at $46.3 billion were very similar to 2018 at $46.6 billion, and first day IPO trading performance was also similar, up an average of 18.1% in 2019 vs. 15.7% in 2018.  

The biggest headline news however was the poor performance of a number of land-mark unicorn tech IPOs, most notably Uber and Lyft.

However, we should not lose sight of the fact that we did see a number of very successful IPOs in the tech sector from cloud, cyber-security, and social-media companies, as investors differentiated among specific companies and in particular looked for companies with sustainable business models and clear paths to profitable growth.  Beyond technology, biotech and fintech were two sectors with robust levels of IPO activity.  

Venture capital was again very active last year in IPOing their portfolio companies, accounting for 54% of all IPOs and a similar number to 2018.  Uber was the most notable VC-backed IPO.

Among already public companies, private equity firms and sponsors took advantage of the favorable secondary equity markets to sell-down their holdings in block trades and there was also a very active convertible market for issuers as companies were able to monetize the high volatility in their stock through public issues combined with a convertible hedge.  The most notable of these deals in 2019 was Tesla’s $1.6 billion issue in May, which included a convertible hedge to move the effective conversion premium from 27.5% to 150%.  SG was a lead bank on both legs of this transaction.

Turning to 2020, what are some of the trends and dynamics that we should look out for?

The equity market backdrop looks quite encouraging.  Ongoing macro themes of modest global economic growth coupled with little pressure for rates to be increased, as well as slow but forward progress on U.S.-China trade negotiations, are all well understood by investors.   This all points to an active new issue market.   At the same time, we are dealing with some significant unknowns.  One is what the economic impact of the coronavirus will be, and another is how markets will react during the run-up to the U.S. presidential election.  Both of these events may have an impact on IPO activity.

There is a large backlog of IPOs building, with well-known names such as Airbnb, online restaurant delivery companies DoorDash, online mattress retailer Casper Sleep, and online trading platform RobinHood on the list.  As was the case last year, where technology and health care-biotech accounted for 69% of all IPOs (both by number of deals and $ volume), these two sectors are expected to represent the lions-share of IPOs in 2020.  At the same time, we anticipate IPOs from other sectors, and interestingly the first $1+ billion IPO on this year’s calendar is from a consumer products company, Reynolds Consumer, which priced on Jan 30th, raising $1.2 billion in an all primary issue and traded up 9.8% the first day of trading.

Among already-public companies, I anticipate a flow of sell-downs by PE and sponsor firms as they take advantage of favorable secondary equity markets to lock-in gains at all-time high stock prices in many cases.  The convertible market again looks poised to be very active, and already in January we have had eleven transactions come to market; which compares to five deals in the month of January last year.  I expect convertible issuance to be dominated again by technology and biotech companies, which represented 46% of issuances in 2019 (both by number of deals and $ volume), as these companies are able to ‘monetize’ and crystallize value from the high volatility in their stock price.

“A big trend seen since the summer of 2019 has been a significant allocation shift by the large U.S. institutional accounts into European equities.”

Direct listings, as opposed to the traditional marketed IPO, have been getting a lot attention.  Do you expect to see an increase in the number of direct listings?

Some perspective is in order here.  There were just two direct listings in 2018, for Spotify and Dell, and then one for Slack last year.   It’s widely thought that Airbnb and DoorDash are considering a direct listing, but I do not expect to see many others coming.  The fundamental issue of not having the process of price discovery that a traditional IPO brings means that direct listings will really only be for companies with high name-recognition and with already active liquidity in the stock in the private market.

What about markets outside the U.S.?  How do you see European new issue markets evolving in 2020?

A big trend seen since the summer of 2019 has been a significant allocation shift by the large U.S. institutional accounts into European equities.  This has been driven by a big valuation differential with the S&P 500 trading at 18.6x forward P/E while the benchmark Europe Stoxx Index is trading at 14.9x forward earnings.   Coupled with this valuation differential, the major investors I talk to are significantly more optimistic on the economic outlook for Europe than they were a year ago.  Clarity on Brexit, with the recent clear UK election result for Boris Johnson, has had a big impact on removing a lot of the uncertainty hanging over European markets.

On the European new issue front, 2019 finished off strongly.  The last major IPO for the year, the €1.8 billion issue for French gaming company La Francaise des Jeux in November was oversubscribed and has traded comfortably above its IPO price.  Societe Generale was global coordinator on this IPO.   
Looking at 2020, there is a strong pipeline of IPOs building in Europe; in particular across UK, France, Germany, but also other countries.  

Moving to another big market, China, what do see as the outlook there for IPOs?

Interestingly, Chinese companies, especially those in the technology sector, continue to look to the U.S. for their primary listing.  This is in spite of a generally poor performance by Chinese IPOs in 2019, which represented approximately 15% of total IPOs (by number of deals) and traded up on average only 1.4% vs. 18.1% for all IPOs. One of the more notable, potential Chinese IPO’s is social media company ByteDance, which is expected to list on the Hong Kong exchange.  Among Chinese companies considering a U.S.-listing, Ucommune Group, which is a Chinese shared workspace company, has been getting a lot of press.  I expect that U.S. and European investors will be selective in evaluating Chinese IPOs, to really understand the issuer’s business model and governance/ownership structure.  And, again, concerning the coronavirus, I would expect a pause in IPO activity until we get a better handle on the impact of the virus on China’s economy.

“I have no doubt that this (ESG) will become one of the most important factors that investors consider in making investment decisions.”

You mentioned governance.  We all read a lot about socially responsible investing.  What do you see evolving on this front in 2020?

I have no doubt that this will become one of the most important factors that investors consider in making investment decisions.  We already see this in Europe, where most of the large institutions now include Environmental, Social and Governance (ESG) metrics as a consideration for all equity investments.  One only had to read Larry Fink’s annual letter to Blackrock’s shareholders, where he announced a series of measures designed to incorporate ESG considerations in all their investment decisions, to get a clear picture that this trend is fast coming to the U.S.

Our Bank is committed to being at the forefront of this global trend towards sustainable business practices and supporting ESG initiatives.  As part of this mission, we are the forefront of working with companies around the world in advising on and financing renewable energy projects.  Interestingly, those U.S. companies that have credentialed themselves as ESG-compliant have actually met with a strong reception from European investors.  We are seeing first-hand how the large globally-oriented European investors include the ESG-metric in deciding which companies to invest in within each sector on a global basis.

Any last thoughts on 2020?

I should add that while most indicators look positive for equity new issue markets in 2020, we should all be mindful than an unforeseen ‘black swan’ event, case in point the Wuhan virus, has the potential to very quickly derail these constructive market dynamics.

Disclaimer

Unless otherwise stated, any views or opinions expressed herein are solely those of David Getzler and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale (“SG”) and its affiliates. No part of David Getzler’s compensation was, is or will be related, directly or indirectly to the specific views expressed herein. This material is provided for information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The information contained herein has been obtained from, and is based upon, sources believed to be reliable, but SG and its affiliates make no representation as to its accuracy and completeness. The views and opinions contained herein are those of the author of this material as of the date of this material and are subject to change without notice. Neither David Getzler nor SG has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein.