Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

It's been a paltry year for initial public offerings. Fewer than 135 companies have made their debuts in U.S. and Canada, putting 2016 on pace to be the slowest for IPOs since 1990, according to data compiled by Bloomberg. With $14.4 billion raised so far, we're also on track to witness the lowest annual total on that score since 1990.

Open or Closed?
U.S. and Canadian IPOs have raised just $14.4 billion this year, set to be the lowest annual total since 1990
Source: Bloomberg
*Data aggregated by trading date, as at September 29

For the companies that have made it to market, the dearth of activity has helped underpin demand. That's especially true in the case of tech IPOs, where (as my colleague Shira Ovide has written) the paucity of new issues has left investors scrambling for any new listing, driving valuations to potentially unsustainable levels. Nutanix, a tech unicorn that priced Thursday evening, will likely continue the trend, with its shares poised for a surge when they begin trading Friday. 

But another crop of listings -- backed by private equity -- has also done well out of the chute this year, and may offer the potential for more lasting gains. 

On average, new issues of private-equity backed companies have rallied 34.5 percent this year through Thursday, topping the 28.2 percent average return for all U.S. and Canadian IPOs during the same period, according to data compiled by Bloomberg. They range from food distributors AdvancePierre Foods and US Foods to Medpace Holdings, a clinical research organization. On Monday, Aritzia -- the Canadian women's-apparel retailer backed by Berkshire Partners -- will join the pack when it begins trading.

Exceeding Expectations
2016's crop of private equity backed initial public offerings have broadly outperformed the market
Source: Bloomberg
*Prices at close of trade on 9/29

Like their tech counterparts, these stocks have benefited from scarcity value. But investors also can reasonably expect that after years of private equity control or influence and the installation of capable management, these companies are operating as efficiently as possible and will continue to perform. An element of timing may also play a part -- private equity firms want to make sure their companies tap the public markets when conditions allow them to maximize profits and are conducive to steady near-to-medium term performance, so they're arguably more discerning than others. 

Some companies like e.l.f. Beauty, which went public last week, may trade at a premium because of their exposure to especially fast-growing industries. Others such as Atkore International, Medpace and AdvancePierre Foods have simply rallied to levels that are justified against their peers after being priced modestly.  In either case, we're not talking about irrational exuberance. 

Hot, Not Overheated
Shares in Cotiviti Holdings, the Advent-backed payment-processing company, priced at $19 and thrived after an early hiccup. At a forward P/E multiple of 23.8, it's still trading at a discount to rival HMS Holdings.
Source: Bloomberg

Whether issuance picks up is an open question. Worries about the potential for market swings has kept many U.S. IPOs on ice this year and that remains a concern. But if stocks remain at or near record highs and volatility as measured by the CBOE's VIX Index remains below 20, there could be a revival in IPO activity, with momentum carrying into the new year. 

Feast or Famine
Spikes in volatility this year have caused many IPO candidates to delay their plans, for fear of unnecessarily losing market value
Source: Bloomberg

A chunk of those deals will be driven by private equity firms whose modus operandi it is to eventually sell the companies in their portfolios. Some already in the pipeline include Spanish-language broadcaster Univision, grocery chain Albertsons, publisher McGraw-Hill Education and for-profit college operator Laureate Education. As the IPO window opens, these may be ones for investors to watch.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net