After Slow 2016, Optimism for Equity Offerings in 2017

© 2017 The Texas Lawbook.

By Bill Howell of Sidley Austin

For a year in which the broader stock market performed well and the Dow Jones Industrial Average gained 13.4 percent, one would have expected to see a similarly strong year for public equity offerings. However, for lawyers and other industry professionals specializing in equity capital markets transactions, including those in Texas, business was off in 2016.

Much of this can be attributed to a slow start to 2016. In fact, most of the gains in the stock market occurred in the second half of the year. For the period from Donald Trump’s election through the end of the year, the Dow gained 7.8 percent – the best performance from Election Day to year’s end since Dwight Eisenhower was elected in 1952.

In Texas, the slow start to the year for equity offerings can largely be explained by a combination of global, national and state factors. Global unease following the Brexit vote and continued worries over China’s growth rate had a chilling effect on broader markets during the first half of the year. On a national level, a contentious presidential race that featured a candidate with relatively unknown policy views kept many investors and issuers on the sidelines.

In Texas, where the energy industry is a significant driver of securities offerings and other transactions, lingering concerns from nearly 18 months of depressed commodity prices resulted in fewer public equity market transactions during the first half of the year.

Continuing Softness in the IPO Market

Often seen as an indicator of confidence in the broader market, initial public offerings continued to decline in 2016. According to IPO investment firm Renaissance Capital, only 105 U.S. companies went public in 2016. This is down from 170 in 2015 and 275 in 2014.

In fact, 2016 was the slowest year since 2009 in terms of number of new issuers going public. Even more concerning is the fact that the $18.8 billion raised by those 105 companies in 2016 represents the fewest proceeds raised in the IPO market since 2003.

The IPO market in Texas largely reflected what was happening in the broader market. According to recent news reports, seven companies headquartered in Texas went public in 2016. This compares to 12 Texas-based companies that went public in 2015. Similar to what we saw in the U.S. market as a whole, 2016 represented the fewest number of IPOs of Texas issuers since 2009.

Of the seven Texas companies that went public in 2016, four of them were energy or infrastructure-related businesses and two of them were biotechnology businesses. The best performing IPO in the group of Texas companies was Irving-based biotech issuer, Reata Pharmaceuticals, which rose more than 100 percent after its debut in May.

Missing from the IPO scene in Texas in 2016 were technology companies. According to Renaissance Capital, only 21 technology companies in the U.S. went public in 2016. None of those issuers was based in Texas. Certainly the West Coast dominates the tech sector for capital raising transactions, but the absence of any new technology issuers in Texas, coupled with the slow start to the year for energy companies, clearly had an impact on IPO activity in Texas last year.

Much like the sluggishness in overall capital markets transactions, there are probably multiple reasons for the down year in IPOs generally. The Brexit vote, low oil prices and the presidential election all likely played a part in the reluctance of private companies to tap the public markets.

Others have suggested an even more long-term – and concerning, if you’re a capital markets practitioner – explanation for the relative inactivity in the IPO market: the diminishing importance of the American public company. The Wall Street Journal reports that the number of publicly traded companies is at 5,734, down almost 40 percent from 9,113 public companies in 1997.

While it seems unlikely that the number of public companies will continue to decline at this rate, there are compelling arguments that the growth in private equity and the shift toward more distributed business models are forcing businesses to re-evaluate whether being a public company is really worth the time and expense.

Reasons to Be Optimistic for 2017

Despite the headwinds in 2016, there are reasons to be optimistic that equity offerings will pick up this year. As already noted, the stock market enjoyed a huge gain for the period from the election through the end of the year and has continued to advance. This has many market professionals bullish on market prospects for 2017.

There are also some policy-related reasons to think equity offerings will pick up in 2017. With a Republican-controlled Congress and a Republican administration, most expect some form of tax reform and relaxation of regulations. Of course, it remains to be seen whether, when and how such initiatives will be implemented. It also remains to be seen whether other policies, such as a more aggressive stance on trade agreements, will have the opposite impact on the markets.

Viewing the IPO market as an indicator of the health of broader capital markets, prospects for a rebound in the number of newly public companies also appear strong. Technology companies are expected to trigger growth in IPOs in the U.S. in 2017, with several big-name tech businesses expected to lead the way, including Uber, Airbnb, Snap, Pinterest, Spotify and Dropbox.

In Texas, while we may see just a handful of technology, biotech and other industry representatives like Austin-based Yeti complete IPOs in 2017, as in years past, energy will likely drive the number of new entrants to the public markets. With a little more stability in commodity prices and the prospects for relaxed restrictions on drilling technologies and oil production, energy companies waiting for an opening to go public may spur IPO activity in Texas. Anecdotally, as many as 25 Texas energy companies have taken affirmative steps, including hiring legal counsel and filing registration statements confidentially, to go public in 2017.

So despite 2016 being a relatively slow year for many securities lawyers and other professionals, industry professionals are gearing up for a busier year in 2017 in Texas and beyond.

Bill Howell is a partner in the M&A, Global Finance and Private Equity groups at Sidley Austin LLP.

This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.

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