Strategic Market Insights

M&A Market Executive Summary

• The M&A market had another strong year in 2018 – Harris Williams closed 87 M&A deals, resulting in back-to-back record years for our firm.
• Seven months into the year, the 2019 outlook for M&A activity remains positive due to slowing opportunities for pure organic growth, relatively strong corporate balance sheets, and an insatiable amount of private equity demand to invest in quality private businesses.
• While the late-stage nature of the economic cycle is top-of-mind for investors, expect marquee assets with resilient business models to continue to command premium prices in competitive processes.
  
• A surplus of capital in the forms of corporate cash reserves and private equity dry powder combined with reasonably aggressive debt providers will continue to support M&A activity levels and valuations. Indeed, S&P 500 aggregate cash positions (excluding financial companies) have hovered near $1.5 trillion over the past few years (Figure 1).

Figure 1: S&P 500 Aggregate Corporate Cash Balances Continue to Grow

Sources: FactSet and Preqin   /   Accessible Version of this chart.

• Global private equity firms have over $1 trillion to invest over the next several years, and healthy annual fundraising levels and limited partner interest continue to increase this amount.^[1]
• Average purchase price multiples continue to be robust, with high-quality assets receiving significant buyer attention (Figure 2).
  

Figure 2: Average Purchase Price Multiples Remain Strong

Source: Standard & Poor’s   /   View Accessible Version of this chart.

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IPO & Follow-on Executive Summary

• After a difficult market emerged in May on ignited trade concerns (breakdown in China negotiations) equities bounced back in June and closed the best first half since 1997.
  • The Dow, S&P and Nasdaq all posted moderate gains of 2.6%, 3.8%, 3.7% respectively following 1Q’s sharp rally. Outperforming sectors included tech, consumer discretionary & communication services, while REITs and utilities underperformed over the quarter.
• Although U.S. 2Q equity and equity related volumes fell modestly year over year to $73.2 billion, IPO volumes surged 80% to ~$25 billion (46 IPOs) with many deals drawing an overflow of demand. A large part of the uptick in IPO proceeds issued was in part due to an increase in large deals going to market.
  • Of the 46 IPOs during 2Q, 23 priced within the range, 16 priced above the range and just 7 priced below the range.
  • The average pricing vs. its filing midpoint +4.6%, and on average 2Q IPOs traded up 32% on the first day of trading.
  • Healthcare and technology deals continued to make up a large portion of IPO issuance.
    • Healthcare led the market making up ~43% of deals by units but just ~11% by proceeds, while tech made up 33% of deals by units and ~65% by proceeds (underscored by deals like Pinterest and Uber).
• In 2Q 2019 there were 73 marketed follow-on’s resulting in $24.3 billion in proceeds, which was slightly lower than the 81 marketed follow-ons in 2Q of 2018 that raised $26.6 billion.
  • On average, offerings priced down 8.8% from filing and had an all-in discount (inclusive of underwriting fees) of 13.2%.
  • Aftermarket performance was positive, with companies trading up ~4.0% on average in the week following an offering.

• In 2Q 2019 there were 27 block trades for $9.3 billion in proceeds, which was materially lower than the 43 block trades completed in 2Q of 2018 that raised $12.9 billion in proceeds.
  • On average, deals were bid at a discount of 3.8% and traded up 1.6% in the week following an offering.
• For the quarter, Solebury advised on 6 IPOs, 3 marketed follow-on’s and 4 block trades for over $9.3 billion in total proceeds.
  • On the IPO front, Solebury advised on Avantor, which was the second largest IPO of the year as well as 3 of the 4 Consumer IPOs year to date (Grocery Outlet, Beyond Meat & REVOLVE).
    • Additionally during 2Q 2019, Solebury advised on Mayville Engineering Co. & Palomar Holdings.
  • Solebury also continued its role in the monetization cycle for some of its most prominent clients as well as new engagements:
    • Engagements included a marketed follow-on post YETI’s October 2018 IPO as well as a marketed follow-on and TEU offering for Aqua America.
    • Solebury advised on 4 block trades in 2Q 2019: two trades for BJ’s Wholesale Club including a clean-up of CVC’s position in the stock, along with Ceridian’s first block trade (Solebury’s fourth advised transaction for the issuer), and the third 144 block trade of lululemon for selling shareholder Advent.
       

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Debt Capital Markets Executive Summary

Middle Market

• Seasoned middle market borrowers are able to raise loan capital in size at a relatively low cost as banks look for ways to grow loan volume. Syndicated middle market volume and number of transactions in the first half of 2019 were both down year over year, with borrowers electing to hit pause in the first quarter, but becoming more active in M&A and refinancing in the second quarter.  We expect the second half of the year to be a good environment for middle market borrowers to refinance or raise new loan capital at attractive pricing and terms.
• Asset-based loans continue to be an attractive source of capital, banks are eager to lend, and borrowers continue to favor banks able to provide large commitments in support of their transactions.