A surge of initial public offering (IPO) listings could take place in the US over the coming months following a pick up in equity markets at the end of the first quarter. It comes after the US IPO market experienced its slowest first three months of the year since the financial crisis and could be good news for exchange traded fund investors who can gain exposure to the market through a variety of funds.
Companies that have recently initiated IPOs in the US and maintain sizeable positions in US IPO ETFs include Facebook, Alibaba, Kraft Heinz, and Paypal.
IPO activity from January to the end of March dropped by more than 75% year-on-year, while total proceeds raised were at their lowest first quarter in over 20 years. Only eight companies went public, each coming from the healthcare sector, to raise a total of $700m. A further nine companies – aiming to raise a combined $1.4bn according to their offer prices – postponed their launches.
Interestingly, due to the unusually low tradable float, those companies who launched this year have actually performed significantly well, averaging a return of 25% over their offer prices. This has come about despite the underperformance of the health care sector compared to broad market indices.
The top-performing IPO was the floating of Editas Medicine, a preclinical biotech developing potentially groundbreaking gene-editing therapies, which ended the quarter up 116%. The two largest IPOs by deal size were Hutchison China MediTech, which already has listings in London, and BeiGene, China’s first biotech to go public in the US in the past 10 years; the companies raised $101m and $158m respectively.
Filings for future IPOs also reached its lowest point since before the adoption of the ‘Jumpstart Our Business Startups’ (JOBS) Act, which was passed in April 2012. The legislation relaxes various securities regulations in an effort to encourage funding for new companies. In total only 24 companies filed an application to go public during the first quarter, down from 48 in 1Q 2015. Of these 24, only seven were filed in February and March.
That being said, there are plenty of candidates for public launches in the pipeline, with a total of 118 companies looking to raise a combined $30bn. Of these, 42 companies make up the “active pipeline,” having submitted new or updated filings since 1 January. Of the 118 total, eight firms are seeking to raise over $500m. The successful launch of one of these larger companies is likely to break the uncertainty in the IPO market and restore its momentum. Recent filers MGM Growth Properties and US Foods are both eligible to launch in late April and could raise $1bn apiece.
Investors looking to gain exposure to the US IPO market through ETFs may wish to consider the following options:
The First Trust US IPO Index UCITS ETF (FPX LN) tracks the IPOX-100 US Index, a modified value-weighted price index measuring the performance of the top 100 US-domiciled companies ranked quarterly by market capitalisation in the IPOX Global Composite Index. The index is rules based and measures the average performance of US IPOS during the first 1000 trading days. Index constituents are selected based on quantitative initial screens.
The fund trades in US dollars and has a total expense ratio of 0.65%. As of 1 April 2016, the market capitalisation of the median company within the fund is $5.4bn. The fund has significant exposure to the information technology (30.9%), consumer discretionary (17.5%), healthcare (16.5%) and consumer staples (12.4%) sectors. The top five holdings in the fund are Facebook (10.2%), Kraft Heinz (8.6%), AbbVie (8.3%), Paypal (4.3%) and Phillips 66 (4.1%).
The First Trust US IPO Index (NYSE Arca: FPX) carries a total expense ratio of 0.60%.
The Renaissance IPO ETF (NYSE: IPO) tracks the Renaissance IPO Index, which reflects approximately the top 80% of newly public companies based on full market capitalization, is weighted by free float capitalization, and imposes a 10% cap on large constituents. Sizable IPOs are added on a fast entry basis and the rest are added during scheduled quarterly reviews. Companies are removed two years after their initial trade date, when they become seasoned equities.
As of 1 April 2016, the fund has significant exposure to the technology (31.5%), financials (28.9%), healthcare (13.2%), and industrials (9.2%) sectors. There are 64 holdings in the fund of which the most concentrated positions are in Alibaba (10.3%), Synchrony Financial (9.8%), Citizens Financial (8.0%) and JD.com (5.9%). The fund has a total expense ratio of 0.60%.