• 8 IPOs had planned to raising $2.6 billion, but instead 5 IPOs raised $1.4 billion
• Despite tech sector's strength, top-performer Pivotal Software gained just 5%; week averaged 2%
• IPO market is not firing on all cylinders, though this week's deals had weaknesses
• Tech sector to be tested next week with 4 tech IPOs, including DocuSign and Smartsheet
The Renaissance IPO Index gained 1.6% this week, beating the S&P 500 (+0.5%). However, the week's five IPOs got an unenthusiastic response, averaging 2%. Just 46% of the year's IPOs trade above issue, and the 50 IPOs average a 5% return. By sector, technology still leads with a 25% average return, followed by energy, averaging 18%. The most active sector, health care, now averages a -5% loss.
The 2Q18 IPO market has started with a few snags, and unlike the prior three months, April deal count (~12) will fall short of last year (20). That said, it still seems probable that May and June will surpass 2017.
| 5 IPOs During the Week of April 16th, 2018 | |||||
|---|---|---|---|---|---|
| Issuer Business |
Deal Size |
Market Cap at IPO |
Price vs. Midpoint |
First Day Return |
Return at 04/20 |
| Pivotal Software (PVTL) | $555M | $4,278M | 0% | +5% | +5% |
| DellEMC spin-off providing a platform to streamline cloud software development. | |||||
| Level One Bancorp (LEVL) | $34M | $217M | 0% | +5% | +5% |
| Michigan-based commercial bank with $1.3 billion in assets. | |||||
| GrafTech International (EAF) | $525M | $4,492M | -33% | -4% | +3% |
| Vertically-integrated manufacturer of graphite electrodes used in steelmaking. | |||||
| MorphoSys (MOR) | $208M | $3,123M | 0% | +5% | +3% |
| Licensing antibodies to pharmas and developing its own novel therapies. | |||||
| Surface Oncology (SURF) | $108M | $454M | 7% | -11% | -8% |
| Developing next-generation cancer therapies to boost the immune system. | |||||
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Pivotal: A Speed Bump for Software IPOs
Losses matter. Spun out of DellEMC, Pivotal Software (PVTL) priced its $555 million IPO at the midpoint, and gained a modest 5%, below most US software IPOs. Despite its high annual sales ($509mm) and relatively strong growth (+22% YoY), Pivotal burned through a whopping $129 million in cash during its last fiscal year, with below-average gross margins (55%). The Nasdaq's sell-off on Thursday and Friday didn't help. Pivotal was the first in a series of 5 US tech IPOs.
GrafTech Drops its Price as Investors Look for a Steal
Steelmaking supplier GrafTech International (EAF) slashed its price by 33% - the year's biggest cut - and raised $525 million. It broke issue, then surged on Friday to finish the week with a 3% gain. Its contracts give it a rosy financial picture over the next 3-5 years, but investors demanded a valuation discount to compensate for a number of risks. GrafTech operates in a niche and highly cyclical industry, its PE backer paid itself massive debt-funded dividends, and the CEO joined in March.
Biotech IPOs continue to struggle: 2 price, 1 delays
MorphoSys (MOR) raised $208 million on its US IPO, giving it a war chest of about $575 million for its large pipeline of antibodies. The biotech priced at $25.04, a 6% discount to its already-traded European shares, and traded up 5% on its first day - not unusual for cross-listings. Valued at $3.1 billion, it was the largest biotech to list in the US in at least 10 years.
Surface Oncology (SURF) priced an upsized IPO at the high end of the range, before dropping 11% in one of the year's worst debuts. That is a rare dynamic for IPOs. Backed by Atlas Venture, Novartis and Lilly, the company is very early stage, requires substantial funding, and operates in a highly competitive space. Insiders indicated on up to $25 million of the deal, but ended up buying $8.5 million.
Another foreign-listed biotech, Mereo BioPharma (MREO), did not price its $70 million offering. The in-licensed rare disease drug developer is now on the calendar as "day-to-day."
Bank on it: Level One Gains 5%
Level One Bancorp (LEVL) traded up a respectable 5%. Raising just $34 million, the regional Michigan bank offered 20% more shares than expected. Regional banks are typically easy to value, and most bank IPOs have been trading well.
2 Large Carve-outs Postpone: AT&T's Vrio and CIBC's FirstCaribbean
AT&T's Vrio (VRIO), which includes its DirecTV Latin America business, postponed its $609 million US IPO. Canadian bank CIBC also postponed its planned spin-off of FirstCaribbean International (FCI), which filed to raise $226 million. In both cases, the companies had reportedly looked for a buyer before the IPO attempt. Both companies were pitched at valuations below their peers, but had multiple country-specific and business-specific risks.
IPO Pipeline Update: Pluralsight files for $100 million IPO
| 3 Filings During the Week of April 16th, 2018 | |||
|---|---|---|---|
| Issuer Business |
Deal Size |
Sector | Lead Underwriter |
| Lovesac (LOVE) | $40M | Consumer Discretionary | Roth Cap. |
| Sells premium couches and beanbag chairs. | |||
| VectoIQ Acquisition (VTIQU) | $200M | SPAC | Cowen |
| Blank check company led by former GM execs and focused on smart transportation businesses. | |||
| Pluralsight (PS) | $100M | Technology | Morgan Stanley |
| Provides online training courses in programming and software development. | |||
IPO Market Snapshot
The Renaissance IPO Indices are market cap weighted baskets of newly public companies. The Renaissance IPO Index has returned 3.2% year-to-date, while the S&P 500 is down -0.1%. Renaissance Capital's IPO ETF (NYSE: IPO) tracks the index, and top ETF holdings include Spotify (SPOT) and Snap (SNAP). The Renaissance International IPO Index is up 3.1% year-to-date, while the ACWX is up 0.6%. Renaissance Capital’s International IPO ETF (NYSE: IPOS) tracks the index, and top ETF holdings include Orsted (DONG Energy) and Samsung BioLogics.
