After several fairly active years in the US primary market, the first quarter of 2016 marked a rather dismal low, with just eight IPOs. There was some improvement in the second quarter, but the level of activity is still far below what it was in the not so distant past. Will it recover, and is the US market open to welcoming public companies, including Israeli ones?
Steve Maletzky, managing director at investment bank Willian Blair, certainly expects to see a few IPOs by Israeli companies on Wall Street in the second half of 2016 and in early 2017. Some of them have already filed confidential statements with the US Securities and Exchange Commission in advance of an IPO. Last week, Maletzky came to Israel for meetings with companies here. William Blair operates in Israel in strategic collaboration with Poalim Capital Markets.
"Since the beginning of the year, there has been a significant decline in IPO deals, in comparison with 2014-2015, and the main reason for that is the supply and the extent of activity we saw in previous years," Maletzky says, talking to "Globes". "Another reason is that private companies have more possibilities today for raising private capital, whether equity or debt, so they can wait before going public, and when there's a volatile market such as we saw in the first half year, that's what they do. Another factor is the weak performance of many of the stocks offered in 2015, with a decline of 15% overall in the stocks that were issued, which led to a decline in the appetite of investors for new offerings."
All the same, Maletzky talks of a degree of change in sentiment in the third quarter. "There is more activity in the entire growth sector, particularly in healthcare and technology," he says, "In the deals that we at William Blair have carried out, we have seen greater interest in company roadshows and over-subscriptions by investors in the offering, so it seems that sentiment has changed. This is despite the fact that one of the main indicators of investor appetite, the flow of capital in mutual funds, still remains negative. We are seeing outflow from the funds and portfolio management companies, so it's hard to expect that there will be a strong IPO market," he says.
In his view, after Labor Day (which falls on September 5), and before the US presidential election (November 8), there will be a rise in the number of offerings, both initial and secondary. "The backlog of offerings is becoming clearer, the market is recovering, and volatility is low. Banks are trying to aim to reach the market before the election, and so in my view the end of the third quarter and the beginning of the fourth will be busy periods for finance deals."
What are investors looking for?
"They are focusing on growth companies, and also on companies with unique economic bases and profitability. There is more interest in companies with higher market caps, which are far safer than 'micro-cap' companies."
What do biotech investors want to see, and what about Israeli companies?
"Investors from the US have always been interested in Israeli technology and in Israeli healthcare companies. Without mentioning names, a number of biotech and high-tech companies are currently working on the IPO process. There are several areas of focus in biotech at present among investment institutions: immuno-oncology, gene therapy, dermatology. Medical devices is a very strong field within the healthcare category, and there's a great deal of interest in that too."
Maletzky sees greater eagerness in Israeli companies to go public. Nevertheless, the market is not waiting expectantly for every company. Maletzky says that for biotech investors it is important to see very credible management in companies making IPOs, and for the most part they also want to see an investment institution or venture capital fund that has already invested in the company taking part. "Many IPOs actually close mainly through an issue to existing investors, with only 30-40% of the offering being new investors. In effect, this is a kind of private placement on a public basis," is how he describes it.
When should a company start the IPO process?
"It depends on the sector. In biotech, I wouldn't recommend making an offering unless there is significant validation from a venture capital fund, and, for Israeli companies, I'd recommend that there should also be a previous investment round in which a US institution invested. In medtech, scale is important, and you need at least $50 million revenue. It's possible to make an IPO earlier, but only on condition that the company has very strong intellectual property and a very large market. In diagnostics it's much harder; we're not seeing much investor interest there. In technology, there is great interest on the part of investors, chiefly in software, Internet, digital, media, and everything that supports the cloud environment. Mobile is still in focus - we have seen good performance in recent offerings. Technology companies have financing possibilities in the private market today as well, and so we have seen many unicorns in the private market. In any event, a technology company with a high growth rate and on its way to profitability has a place in the US capital market."
What are the outstanding trends in the secondary market?
"Historically, this is a more resilient market than the IPO market, because there's no question of 'will a deal take place?' but only a question of price, and there's already an investor base. Even so, we saw a decline in this market in the early part of the year, a trend that is starting to change. There was a great deal of activity in biotech in the past few weeks, although investors are demanding a higher discount in order to participate. They want to find investments that will outperform, and they have less money for investment because of the outflows - money switching to passive investments, for example - and so for the extra dollar that they invest they demand a discount."
Who will the market vote for?
As the US presidential election nears, Maletzky, as mentioned, expects the offerings market to be active. The question is what will happen afterwards, when it becomes known who will sit in the White House: Hillary Clinton or Donald Trump. Maletzky laughs: "Without choosing sides, I'll say that investors on the capital market like certainty and dislike instability. There could be instability on the market around a Trump victory. On the other hand, there are open questions concerning Clinton's health and taxation policies. In general, stability and consistency are better for the US market and the global market."
Just a few weeks ago the markets shook because of Brexit. Is the effect on the markets over?
"Brexit enabled the markets to recalibrate, and that was the sharp fall we saw immediately after it. The market absorbed the news, and that is not the main focus affecting investors' interest in deals. I don't think we'll see further effects in the short term, but we don’t know what the separation itself will look like."
William Blair, which was founded in 1935, is located in Chicago with branches in the US, Germany, the UK, Switzerland, Brazil and Australia. Prominent deals in which it has been involved in Israel include the IPOs of Mobileye, CyberArk and Chiasma, and secondary offerings of Radcom and AudioCodes.
Published by Globes [online], Israel business news - www.globes-online.com - on August 23, 2016
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