According to data published by Renaissance Capital Markets, US IPO activity has dipped almost 48% so far this year to one of the lowest levels seen in years – a factor that’s likely to continue to depress Wall Street earnings and be an ongoing drag on industry employment for the foreseeable future.
IPO Activity Continues to Slump
From the beginning of 2016 through September 25th a total of $11.8 bln in new issue proceeds have been raised in the US capital markets. This amount is 47.9% lower than what was raised during the same period last year, and is 83.2% lower than near-term peak of $70.4 bln raised during the first three quarters of 2014.
During the same period, 71 new issues were priced – a drop of 47% from the 134 deals during the same period in 2015, representing the lowest number of IPOs priced during a comparative period since 2009. So far this year, 95 new issues were filed, 49% lower than the 186 new issues which were filed during the same period last year.
Equity Capital Markets Revenue Plunges
This weakness in IPO activity is certainly having a negative impact on Wall Street earnings. According to an article published last week in the Wall Street Journal, equity underwriting revenue at investment banks Goldman Sachs, J.P. Morgan Chase, and Morgan Stanley all fell between 40% to 60% during the first 6 months of this year compared with the same period in 2015.
In fact, according to data published by Dealogic, US investment banks have earned a paltry $3.7 billion in fees from U.S.-listed equity deals so far this year – the lowest level of equity capital markets revenue seen during a comparable period in over 20 years.
Our Take
Clearly, low interest rates and the increased availability of private equity funding have enabled early stage companies to find alternative ways to raise growth capital versus going public. The big question for investment banks is whether this trend is cyclical, or is it part of a longer term shift in the way companies’ finance their growth as IPO underwriting has historically been an extremely profitable offering.
We suspect that the current weakness in the IPO market is likely to dampen Wall Street earnings and should keep a lid on investment bank hiring, including in their equity research departments. This factor, combined with the uncertainty caused by various regulatory changes like MiFID II, could motivate an increased number of Wall Street analysts to exit the sell-side for the promise of setting up their own independent research shops.