Friday Letter: Crack a window

2014 was a solid year for IPOs according to the latest round of data from Proskauer.  According to their examination of public offerings for the year, IPOs raised aggregate proceeds of $85.3 billion – a number that hasn't been seen since before the financial crisis. In fact 16 of those IPOs raised at least $1 billion, the most in any year since 2001.  Aftermarket activity for IPOs was also strong last year, with total returns averaging 21 percent, exceeding the 10 year average of 15 percent.
 
Yet, first quarter data for this year isn't as rosy.  According to analysis from both Thomson Reuters and CohnReznick IPO activity in the first quarter was the lowest since 2010.  On a quantitative basis, that represents a 57 percent drop in activity. Through March 20, 2015, only 32 IPOs priced, compared to 74 in Q1 2014.
 
The decrease in IPO activity was particularly felt among middle market companies (companies with market caps between $10 million and $2 billion post IPO), which saw only 27 IPOs in Q1 2015, compared to 62 in Q1 2014. 
 
At first blush, it's tempting to believe the numbers suggest a closing IPO window, a vital exit route for GPs still looking to offload boom-era deals. But beneath the numbers is a calming narrative that suggests last quarters stats are being primarily driven by one sector.
 
Researchers at CohnReznick point to the steep drop off in healthcare related IPOs.  For middle market healthcare companies only 5 went public in the first quarter compared to 26 over the same period last year.  Indeed, the middle market is a key indicator of where things are headed CohnReznick says.
 
IPO windows can be unpredictable, driven by momentum, and with a growing number of high priced unicorns walking around, the market may be looking for a new exit strategy.  A few high profile IPOs are on deck for the coming months including Etsy, and GoDaddy, but for companies in the shadows of those spotlights another pathway to capital formation may be more desirable.
 
Evidence of this can be found in current M&A activity levels, which are hitting new highs. According to Thomson Reuters worldwide M&A is up 25 percent for the quarter, the strongest quarter for deal making since 2007.  US M&A is at a fifteen year high, with $415.9 billion worth of deals done during the first quarter alone – much of that led by healthcare. As PEI has reported, 2014 was a strong year for private equity fundraising as well, which is likely bolstering this new wave of deal making, as GPs are flush with cash and looking for deals.
 
In our interview with GTCR in the new April issue of the magazine, Dean Mihas, head of the firm's healthcare group said he expects to see the robust M&A environment in healthcare continue. For well-positioned GPs, even if the IPO window is closing, M&A may be opening up.