EconomicOptimism Can’t Lift IPOs

Proceeds Raised and IPO Count

Business leaders and investors are generally optimistic about the U.S. economy and their ability to grow and achieve their fi nancial goals. According to responses from a recent survey conducted as part of CohnReznick’s Annual Liquidity and Capital Formation National Conference, middle market companies and investors are overwhelmingly optimistic in the strength of the U.S. business environment.

Proceeds Raised and IPO Count

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But the confi dence expressed by middle market executives hasn’t helped lift the spirits of companies who once viewed the IPO as a “next step” in their growth trajectory. And optimism in the economy hasn’t encouraged public investors to clamor for more IPOs.

For U.S. listed companies,2016 was the worst year for IPOs since 2008 with the fewest proceeds raised from IPOs since 1990.

In fact, nearly

of those surveyed reported that they were “confi dent” or “very confi dent” in the business environment, suggesting a strong forecast for growth heading into 2017.

80%

Q4 2016 Middle Market Equity Capital Report

Public Equity Capital Transaction Activity

IPO Activity

Follow-onActivity36% 11%

Proceeds Raised from Follow-Ons15%

Average Follow-On Proceeds4%

ProceedsRaisedfrom IPOs

38%

Average IPOProceeds 5%

2016 CHANGES FROM 2015

IPO and follow-on activity slowed signifi cantly in 2016. During the year, several factors may have impeded progress—the Brexit vote in the U.K., uncertainty surrounding interest rates, concerns about an economic slowdown overseas, and the pending outcome of the U.S. presidential election. In 2016, companies postponed or cancelled IPO plans in favor of private transactions. In place of IPOs, proceeds from mergers and acquisitions fueled by private equity, corporate buyers, and foreign investors have been returning capital to shareholders.

Proceeds Raised

2016 6 CHANGES FROM 22015

AverageAverage

Middle Market IPOs and Follow-ons

IPO Activity

Follow-onActivity

36%

19%

29%

ProceedsRaisedfrom IPOs

44%

Average IPOProceeds

13%

2016 CHANGES FROM 2015

15 %

Proceeds Raised from Follow-Ons

Average Follow-On Proceeds

CohnReznick defi nes middle market IPOs as those issued by companies with between $10 million and $2 billion in market value post-IPO. In the United States, nearly 200,000 middle market companies account for 44.5 million jobs, generating more than $10 trillion in combined revenues annually (National Center for the Middle Market). As the middle market goes―so goes the U.S. economy. A capital markets ecosystem that encourages increased levels of capital formation and transaction activity serves as a solid foundation for economic growth.

In 2016, middle market IPO transaction activity decreased, trending in much the same way as overall IPO activity. Like their larger counterparts, middle market companies stayed away from the public markets. Instead, they postponed or canceled their IPO plans, choosing instead to pursue private capital or to wait for a more favorable IPO environment.

Activity

ProceedsProceedsProceeds

19from IPOs

29IPOProceeds

13 Proceeds Proceeds

Middle Market Industry PerspectiveWith a broad decline in overall IPO transaction activity, few industry sectors escaped without similar declines. Even healthcare and life sciences IPO activity, typically an attractive industry sector for investors, took a hit. When compared to 2015, healthcare and life sciences, fi nancial services, hospitality, and real estate IPO activity decreased. Conversely, energy and utilities sector IPOs recorded a healthy increase―possibly due to rising crude oil prices and anticipated deregulation in Washington.

Healthcareand

Life Sciences

39%

Financial Services

60%

RealEstate

57%

Energy and

Utilities

40%

Hospitality

75%

Conclusion: Looking Forward

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The continued availability of private capital and the appetite for growth through mergers and acquisitions will continue to exert downward pressure on IPO and follow-on activity in 2017. Until we gain greater clarity around the policies of the Trump administration, and domestic and global reaction to those policies, it is diffi cult to predict their impact on U.S. IPO transaction activity with any degree of certainty. Instead of riding the wave of increased IPO activity, in 2017 we believe that middle market companies and investors may fi nd that market conditions suggest a more opportunistic approach to capital raising versus going public.

Utilizing comprehensive resources and deep industry expertise, the professionals of CohnReznick’s Public Companies Group understand the goals of both middle market companies and investors to deliver timely and appropriate solutions and services. We understand the challenges and opportunities of the capital markets and possess the forward thinking technical skills and experience necessary to address the needs of clients, investment bankers, investment advisors, attorneys, lenders, investors, managements, audit committees, and the U.S. Securities and Exchange Commission and other regulatory authorities.

For more information, please contact Alex Castelli, Partner, National Liquidity and Capital Formation Advisory Group and Technology and Life Sciences Industry Practice Leader, at alex.castelli@cohnreznick.com or 703-744-6708.

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