New offering will test frozen IPO market

Bats Global deal seen as 'ice-breaker'

Apr 14, 2016 @ 1:20 pm

By Jeff Benjamin

The financial markets are closely watching the initial public stock offering by Bats Global Markets, which is being described as the ice-breaker in an IPO market that has been virtually frozen solid this year.

The stock exchange operator, which will compete with the Nasdaq and the New York Stock Exchange, is expected to be a $239 million deal, issuing 13.3 million shares at between $17 and $19 when it prices after the market closes on Thursday.

While there have been a handful of public stock sales this year, they have been largely supported by existing backers. The Bats Global offering is the “ice breaker from a winter freeze,” said Kathleen Smith, principal at Renaissance Capital.

“The IPO market has essentially been shut down,” she added. “When you're going public coming out of these kinds of periods, you tend to see companies with solid fundamentals.”

Bats Global is expected to see at least three other companies follow it to the capital markets.

MGM Growth Properties is hoping to raise $975 million through the sale of 50 million shares, American Rental Associates, a healthcare sector company, is aiming to raise $161 million through the sale of 7.5 million shares, and SecureWorks, a spinoff from Dell, plans to raise $149 million by selling 9 million shares.

“Let's just say that the IPO window is cracked open if you have real companies with real products and services,” said Daniel Wiener, chief executive of Adviser Investments.

“I think investors are still really nervous, especially about the presidential election,” he added. “Given the stock market correction earlier this year and with valuations on the high side and the economy in a slow-growth mode, it's not surprising that the IPO window has almost completely closed down.”

While the IPO market might have been quiet this year, the pickup in investor appetite for new issues can be seen in the recent performance by the handful of funds tracking IPOs since the broader market started to calm down in mid-February.

From Feb. 11 through April 14, the First Trust U.S. IPO ETF (FPX) is up 17%, which compares to a 14% gain by the S&P 500 Index over the same period.

The Catalyst IPO Allocation mutual fund (OIPAX) is up 19%, over the period, and the Renaissance IPO ETF (IPO) is up more than 25%.

Josef Schuster, who manages the underlying index of the First Trust IPO ETF, described the string of companies that are ready to price over the next week as a “definite turnaround” for public stock offerings.

“The markets are fairly strong, and it's back to risk-on in the markets again,” he said. “And the IPO market is always set up to benefit from rising stock prices.”

Meanwhile, not everyone is ready to break out the champagne in celebration of a resurgence of the IPO market.

“You'd have to have a tsunami of IPOs in order to make up for the drought we've seen this year, which is odd because the overall markets are not as bad as they were in 2009, the last time the IPO market was frozen like this,” said Zachary Karabell, head of global strategy at Envestnet.

Mr. Karabell believes there are a lot more factors at play than just a nervous investor base.

“It's a lot more expensive and arduous for companies to go public now than it was even five years ago,” he said. “It's harder to go public, and it's more expensive, so companies are feeling if they don't have to go public, they will just stay private.”

Scott Delgado, director and head of capital markets at CAIS, said he isn't putting too much emphasis on the Bats Global offering, but he will be watching for what comes to market afterward.

“This is going to be the first few steps to find out how firm a footing we're on,” he said. “The IPO backlog is very large, and we all know they're there.”

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