34 Friday 7 October 2016
NICOLE BULLOCK — NEW YORK
Shares of Nutanix, a California-basedcloud storage company and
tech “uni-corn”, recently soared 131 per cent in
itsWallStreetdebut. Itwasthe largest first-day “pop” for 2016 and
the second larg-est for a US tech company since 2000
—thetwilightdaysof the internetboom.
The performance comes in what hasbeen a terrible year for US
listings ingeneral and technology deals in particu-lar, leaving
more attention on unicorns,privately held tech start-ups that
haveachievedvaluationsofmorethan$1bn.
According to Dealogic, both are run-ning at the slowest pace
since just afterthe financial crisis when dealmakingdried up.
Bankers’ fees year-to-datehavenotevenbrokenthe$1bnmark.
The decline is partly the result ofrenewed market volatility,
especially atthe start of 2016 when more deals werewithdrawn than
executed, and a nerv-ousness on the part of investors even
astheunderlyingmarkethasralliedto fur-therhighs.
A potentially more enduring factor isthe fact that the emerging
tech compa-nies that were once the bedrock of thismarket —
represented these days byUber, Snapchat, Airbnb and others —have
been able to raise billions of dollarsat attractive valuations
privately, avoid-ing the costly and demanding aspects
ofbeingapubliccompany.
Nascent momentum building for theIPO market and a string of
successfultech deals could begin to test the vexingquestion of
whether the downturn in USlistings iscyclicalorsecular.
“We will see a much more balancedandconsistentlyactiveglobal
IPOcalen-dar as we get into year end. I just don’tsee the end of
the IPO product that peo-ple are calling for,” says Evan
Damast,global head of equity and fixed income
syndicate at Morgan Stanley. “The pri-vate capital markets’
alternative is just amode of execution. The ability of com-panies
to raise money in that fashionhas extended the timeline to going
pub-lic but not eliminated the need to gopublic.”
The large unicorns are not expectedto go public soon, but some
smaller techcompanies have started to list again.Their success is
raising hopes that themarketwillbegintorecover.
Five venture capital-backed techdeals listed in September, and
four ofthem priced above their range, notesMatthew Kennedy, an
analyst at Renais-sance Capital, which runs
IPO-focusedexchangetradedfunds.
Coupa Software priced shares at thetop of the projected range,
achieving avaluation above the latest private fund-ing round, as
did Nutanix last week.
Coupa shares doubled on debut yester-day. Fears of a so-called
down round arebelieved to have kept some unicornsaway from listing.
“The past month hasrepresented a major shift in the IPOmarket
compared to the early part
oftheyear,”MrKennedysays.“Weweren’tseeing tech deals and we weren’t
see thismuchadvancedemand.”
The recent flurry of activity stillcomes against a low base. So
far thisyear, US-listed IPOs are down 45 percent from the same
period a year ago atabout $16bn to the lowest level
since2009.TechIPOstotal justover$3bn.
Companies and their bankers alsohave priced recent IPOs
conservatively,whichhelps toexplainthegains.
“Broadly speaking, public tech multi-ples are still below
2014-15,” MrKennedy says. “So these new deals areoften coming
public below peers, and
below historical levels, despite highergrowth.”
It is self-fulfilling, though: new dealspique investor interest
and get morecompanies thinkingaboutgoingpublic.
“In 2015, the vast majority of IPOsweretradingbelowtheir
issueprice,andthat cooled investor sentiment, but per-formance this
year has been muchstronger,” says Jeff Zajkowski, co-headof equity
capital markets in the Ameri-casat JPMorgan.
Renaissance’s data show 2016 dealsare up 39 per cent on average
with techIPOsup88percent.
A recent listing from Noble Mid-stream, the first direct energy
IPO innearly a year, is also a promising sign.These deals dried up
with the tumult inthe oil price, which has roiled
energycompanies.Additional reporting by Adam Samson
Analysis. Equities
Unicorn tech IPOs raise Wall St recovery hopes
Growing demand looks set
to test whether the dip in US
listings is cyclical or secular
MEHREEN KHAN
Portugal’s economy is stuckin a “vicious circle” of highdebt,
low growth and stall-ing economic reforms, a rat-ing agency has
warnedahead of a decision on thecountry’sborrowerstatus.
Fergus McCormick, chiefeconomist at DBRS, saidgrowth had
decelerated andgovernment bond yields hadrisen, placing
“downwardpressure” on Portugal’sinvestment-graderating.
DBRS of Canada is the onlyone of the four rating agen-cies
recognised by the Euro-pean Central Bank that stillgivesPortugal
sucharating.
A downgrade on October21 would threaten Lisbon’seligibility for
the ECB’s quan-titativeeasingprogramme.
“They really are in avicious circle, stuck with lowgrowth, and
have large struc-tural problems,” said MrMcCormick.
Portugal’s 10-year bondyield was up 6 basis points at3.52 per
cent yesterday, aneight-month peak, havingclimbed from 2.7 per
centsincemid-August.
ECB asset purchases havekept a lid on Portugal’s bondyields
since March 2015. Butinvestors have begun to takea dimmer view on
the coun-try, which was forced into a€78bn international
bailoutin2012.
“The market has shunnedPortugal bonds,” said MarcChandler at
Brown BrothersHarriman, who noted thatdomestic banks held a lot
oftheir government’s debt.“The sovereign-bank
linkhasnotbeensevered.”
Higher government bor-rowing costs and a creditsqueeze on banks
haveraised the prospect of
another bailout for Lisbontwo years after it exited
itslastone.
“The only way to easethese tensions and regainaccess to the ECB
liquidityandQEprogrammewouldbefor the Portuguese govern-ment to
request a secondbailout,” said Yvan MamaletatSociétéGénérale.
Such a drastic move wouldbe politically “unpalatable”for the
anti-austerity govern-ment, he added, but with a“weakening
budgetary situa-tion and a funding squeezeon banks, a new
programmewould eventually be needed— likely triggering a
politicalcrisis and early elections,which in turn could
prolongthefundingsqueeze”.
Mr McCormick said therewere “two negatives and onepositive” on
DBRS’s outlookfor Portugal, and it was hope-ful that the
Socialist-led gov-ernment would begin to plugits budget deficit and
carryout reforms to boost growthandproductivity.
The economy grew just0.2 per cent in the secondquarter, adding
pressure onthe debt pile, which is morethan130percentofGDP.
Annual growth is set toslow to 1 per cent this yearfrom an
earlier estimate of1.5 per cent, and 1.1 percent next year,
according tothe International MonetaryFund.
Portugal had not yetembarked on “comprehen-sive” plans to
restructurelenders, hampered byEurope’s new “bail-in” laws,which
prevented govern-ment aid for banks beforeinvestors took a hit,
addedMr McCormick. “We are notpanicking. We have a stabletrend but
I do worry aboutthemediumterm.”
Capital markets
Portugal rating at riskas pressures mount
W hen an event is labelled a milestone inmarkets, the tag tends
to refer to signifi-cance in hindsight or to a
development’spotential, but not something that
reallymattersontheday.
China, however, is racking up those landmarks at such arate that
each one is gaining greater market-moving pow-ers. A collective
noun could be justified: a (long) march ofmilestones,perhaps?
The latest example is the renminbi’s formal inclusion asa global
reserve currency last weekend when it was addedto the other four
currencies that back the InternationalMonetary Fund’s special
drawing rights. Next will be theopening of the Shenzhen stock
connect link with HongKong,duebyyear-end,whichwillgive
international inves-tors direct access to the southern city’s
fast-growing tech-nology stocks. A milestone already passed this
year wasthe opening of the vast onshore bond markets to fargreater
foreign investment.
Chinese milestones matter more than in other marketsbecause of
the country’s size and growing global financialheft. The onshore
bond markets total $7.5tn and are thethird-largest in the world,
while China’s stock markets arethe second largest, worth $7.3tn.
The renminbi’s additionto the SDR basket, the first such move in
more than 30years,marksanewlevelofglobalacceptance.
Aside fromtheir size, thisyear’s landmarkssuggestdeepchanges
taking place in mainland markets and in regula-tors’ attitudes
towards foreigncapital. This is the commonthread increasing the
market-moving potential, as the indi-rect effects of the changes
out-weighthesumsinvolved.
That effect was on show thisweek with the weakening ofthe
renminbi following itsSDR inclusion.
Analystsexpectedthataddingthecurrencytothebasketwouldcre-ate demand
for perhaps $30bn of renminbi from institu-tions that used SDRs as
a unit of account. The buying willtake months, so it is not of a
sum nor a timescale to movethe market in either direction. Yet this
week the offshorerenminbi drifted steadily to its lowest level in
more thantwo months as investors bet that officials would relax
theirgrip on the currency’s levels now that inclusion
confirmeditsrisingstatus intheworld.
Another example is the interbank bond market. Newrules in effect
mean foreign investors no longer need toseek approval from Beijing
for a quota to invest in onshorebonds — an arduous process. In a
sign of Beijing’s willing-ness to experiment with delegation,
would-be bondhold-ersneedapprovalonly
fromanauthorisedagentbank.
It was giant shift, but take-up was expected to be
slow,heldbackbyunfamiliaritywith local
issuersandfearsovercreditquality.Yet just
lastweekasurveybyDeutscheBankrevealed that global investors planned
to double theironshoreholdings inthenextyear.
Not every milestone has been passed. The biggest missthis year
was MSCI’s decision not to include mainlandstocks in its global
emerging markets index because ofconcerns over capital controls and
market regulation. Callthat twosteps forward,onestepback.
The link with Shenzhen will test whether equity inves-tors are
warming to the milestone effect. Initial reactionwas muted, but
bankers were reporting gradually risinginterest
inthestockstobetraded.
For Shenzhen, and for other future landmarks, the realtest is
one of local versus international investors. MSCI’sdecision was
based mainly on the wishes of investors out-side the region, many
of whom have long been scepticalaboutChina.
Deutsche’s bond survey, meanwhile, polled local-cur-rency
investors who were more familiar with markets,while those reading
the renminbi runes most closely werealso based in the region. That
suggests the impact ofChina’s liberalisationmilestones isbuilding
intheregion, ifnot furtherafield.
Milestones don’t snowball — at least not in metaphorsallowed by
newspaper editors. However, that awkwardanalogy works here. There
will doubtless be more stepsbackwards. But there is very much a
sense that forwardmomentumisgrowing.
[email protected]
INSIGHT
JenniferHughes
China’s year of themilestones is havinga cumulative impact
Shenzhen linkwill test whetherequity investorsare warmingto the
effect
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More comment and data on ft.com
FT graphic Source: Dealogic
Biggest US IPOs this year
$1.3bn
Gain in share price from o�er to current
$1.2bn $1.2bn
$759m $719m $690m
Jul 11
Line Corp
Total value ($)
MGM GrowthProperties
US FoodsHolding
Valvoline Pantheon CF Corp
Apr 19 May 25 May 19Sep 22 Jul 20
22.05% 2.13% 5.14% 40.62% 1.90%50.61%
Top 10 US IPO listings, 2016% change, IPO to latest price
0 100 200 300
Acacia Comms (May 12)
Twilio (Jun 22)
Clearside Biomedical(Jun 01)
Nutanix (Sep 29)
Impinj (Jul 20)
Reata Pharma (May 25)
AveXis (Feb 10)
TPI Composite (Jul 21)
Proteostasis Therapeutic(Feb 10)
Novan (Sep 20)
Slow and steady
‘Ability toraise money[privately]has justextendedthe timelineto
goingpublic’
OCTOBER 7 2016 Section:Markets Time: 6/10/2016 - 19:08 User:
swordsd Page Name: MARKETS3, Part,Page,Edition: LON, 34, 1
