Q3 2019

ECM Quarterly
Third-Quarter IPO Activity Slows
Amid Market Volatility and
Unicorn Scrutiny

In This Report
Several blockbuster IPOs struggle;
Equity Capital investors focus on profitability

Markets Update
Healthcare and next-generation
internet-enabled companies dominate
new filings
Follow-on activity slows on summer lull
and broader market concerns
Q4 outlook: Market should remain
open, but slowdown could continue
 EXECUTIVE SUMMARY
Third-Quarter IPO Activity Slows Amid Market Volatility
and Unicorn Scrutiny
IPO activity hit a
speedbump in the third
quarter as 33 offerings
priced, raising $10.4
billion. Headline-driven
market volatility prompted
caution among investors,
and high-profile unicorns
faced greater scrutiny
from investors.
Major U.S. indexes posted mixed
results in the third quarter but
remained near record highs to end the
quarter. The volatile summer was
dominated by ongoing concerns
related to trade tensions between the
United States and China, the
possibility of a global economic
slowdown, and the Federal Reserve’s
evolving stance on interest rates. In
July, the Federal Reserve cut interest
rates for the first time since the
economic crisis and then followed that
with another rate cut in September;
investors are pricing-in a 67% chance
of another rate cut by year-end.
In the third quarter, the Dow Jones
Industrial Average and the S&P 500
both gained 1.2%, outperforming the
Nasdaq (-0.1%) and the Russell 2000
small-cap index (-2.8%). Third-
quarter revenue for the S&P 500 is
expected to grow 2.8% year-over-
year, the lowest growth rate since
2016, while earnings are expected to
decline 3.7% year-over-year, which
would mark the first time the index
has reported three consecutive
quarters of earnings declines since
2016. The U.S. dollar reached a 52-
week high against a basket of global
currencies to finish the quarter, which
may negatively affect upcoming
corporate earnings results among
export-focused firms.
1
Assets continue to flow out of actively
managed funds and into passively
managed funds; active funds have lost
$124 billion this year, while passive
funds have gained $89 billion. Passive
funds now account for more than half
of all equity market capital. To
mitigate downside risk in a volatile
market environment, investors have
increasingly turned to mutual funds
and ETFs that use options strategies.
Assets for these funds have surged
24% year-to-date, reaching a record
high of $22 billion at the end of
August, according to Morningstar data.
Several Blockbuster IPOs Struggle;
Investors Focus on Profitability
Thirty-three offerings priced in the
third quarter, generating proceeds of
$10.4 billion, a decrease relative to
both the previous quarter and Q3
2018. While a summer slowdown is
typical in the IPO market, particularly
in August, the combination of broader
market volatility, the rotation from
momentum stocks to value stocks, and
an erosion of investor confidence in
companies that are generating losses
also hampered new issuance activity.
Third Quarter 2019 IPOs by Sector
Technology and healthcare companies accounted for more than 70% of IPO
activity during the third quarter, extending a multiyear trend .
1 1
3
12
4
12
Source: Dealogic
The recent struggles of high-profile
unicorn IPOs, such as Uber and Lyft,
that have no clear path to profitability,
coupled with greater economic
uncertainty, have led investors to be
increasingly selective when
considering investments in
unprofitable companies.
The long-anticipated IPO of The We
Company, a shared workspace
provider (a.k.a. WeWork), was
ultimately pulled as investors pushed
back on the company’s proposed
valuation, massive losses, and
corporate governance practices.
Entertainment company Endeavor
Group Holdings also withdrew its IPO,
which was expected to raise $600
million, in September, citing market
conditions. Many private companies
continue to assess alternative means
of achieving public listings, including
direct listings and special purpose
acquisition company (SPAC) mergers,
in light of recent high-profile
IPO struggles.
SmileDirectClub, a direct-to-consumer
orthodontics provider, and Peloton, an
internet-enabled exercise bike
Technology
Healthcare
Financial
Consumer
Services
Industrial
manufacturer, were the two largest
IPOs of the quarter, raising $1.3 billion
and $1.2 billion, respectively. While
both companies achieved positive
pricings, aftermarket performance for
SmileDirectClub and Peloton has
been lukewarm.
IPO performance was mixed.
Approximately 88% of third-quarter
IPOs priced in or above their filing
range, up from 83% for the full year of
2018. Average first-day returns
declined to 17%, down from 28% in
Q2 2019, and average aftermarket
returns were 4%, as performance
weakened throughout the quarter.
long-awaited debut appears more
likely to occur via a direct listing than
a traditional IPO.
Next-generation internet-enabled
companies will continue to broaden
the IPO market beyond healthcare and
technology. Issuers expected to file in
the near term include mobile-based
insurer Lemonade, online food
delivery platform Postmates, and
online mattress retailer Casper. In
addition, Bitcoin mining company
Bitmain Technologies may seek to
capitalize on cryptocurrency’s strong
performance year-to-date through a
filing of its own.
challenge equity markets, including
unexpected monetary policy,
escalating trade tensions, and political
uncertainty in the United States
following the impeachment inquiry of
President Trump and the approaching
2020 election, as well as weaker-than-
expected economic reports and
corporate earnings results.
Momentum in the IPO market has
slowed due to recent high-profile
mishaps; however, elevated venture
capital and crossover activity in the
healthcare and technology sectors
should continue to fuel the
IPO pipeline.

Israeli medical aesthetics company

InMode was the quarter’s top-
performing IPO, gaining 54%
following its August debut. Japanese
restaurant operator Kura Sushi,
property and casualty insurer
ProSight Global, Brazilian healthcare
education group Afya, and healthcare
software provider Phreesia rounded
out the top-five performers, each
delivering returns of 35% or greater.
Next-Generation Internet-Enabled
Companies Dominate New Filings
In the third quarter, 60 companies
filed to go public, slightly below the 65
companies that filed in the previous
quarter. The active backlog now totals
66 companies seeking to raise
$5 billion.
Companies increasingly are taking
advantage of the SEC rule that allows
all companies, regardless of size, to file
confidentially, reducing visibility into
the full IPO pipeline. The shadow
backlog of companies expected to
move forward with plans to go public
remains robust, but poor recent
performance may delay certain IPO
plans. Online accommodation provider
Airbnb announced its intention to go
public in 2020; however, the unicorn’s
Follow-on Activity Slows on
Summer Lull and Broader
Market Concerns
In the third quarter, 125 follow-ons
priced to raise $28 billion in total
proceeds, as overall activity slowed
due to broader market volatility and a
seasonal lull in activity during late
August. Healthcare continues to be the
most active sector in terms of follow-
on offerings, accounting for more than
50% of third-quarter activity.
Convertible debt activity continued at
a robust pace in the third quarter as
41 offerings priced, raising $21 billion
in total proceeds. Technology and
healthcare companies accounted for
more than 80% of third-quarter
activity, with 17 offerings and 16
offerings, respectively.
Outlook: Positive, but Potentially
Volatile, Fourth-Quarter
Capital Raising
Market conditions remain positive, as
highly accommodative U.S. and global
economic policies continue to
stimulate growth and investor risk
appetite, yet the potential for ongoing
bouts of market volatility remains.
Several potential risks will continue to
William Blair 2
MARKET UPDATE AND ANALYSIS

Index, Sector, and Asset Class Performance – 2019 YTD

Despite the major indexes delivering mixed results in the third quarter, the S&P
500 is up 18.7% year-to-date, marking the index’s best yearly performance
through the third quarter since 1997. The Nasdaq, which declined 0.1% in the
third quarter, remains the best-performing index year-to-date, up 20.6%.

Nasdaq 20.6%
S&P 500 18.7%
DJIA 15.4%
Russell 2000 13.0%
VIX (36.1%)
Services 36.7%
Technology 25.2%
Consumer 20.9%
Industrial 18.0%
Financial 17.6%
Energy 12.7%
ECM Quarterly Healthcare 4.2%

Market Analysis Crude Oil 19.1%

Euro per Dollar 4.9%
Each quarter we look behind U.S. 10YR T-Note (37.5%)
the numbers to examine the IPOs 9.1%
trends and dynamics that are Follow-Ons (10.2%)
driving activity in equity Sources: Dealogic and FactSet; data through 9/30/19
capital markets.
IPO Volume by Year and Quarter
Thirty-three U.S.-listed IPOs priced in the third quarter of 2019, representing a
30% decline from the 49 IPOs that priced in the third quarter of 2018.

($ in billions) # IPOs >$1.0Bn Deal Value:

2017: 4
$47.9 2018: 11
$41.6 2019YTD: 8
$34.0
177 $26.2
138 $12.4
$10.4
109 $7.6 $5.0

49 59
35 33
17

2017 2018 2019YTD 3Q2018 4Q2018 1Q2019 2Q2019 3Q2019

# of IPOs Gross Proceeds ($Bn)

Sources: Dealogic and FactSet

Note: All IPO and follow-on data excludes offerings for yield products
(BDCs, CLEFs, MLPs, SPACs and REITs)

3
IPO Overview – Third Quarter 2019
SmileDirectClub, which raised $1.3 billion in its September IPO, was the largest IPO of the third quarter. SmileDirectClub
became the first IPO in three years to price above the initial range but close below its issue price on the first day of trading.
Third-quarter median proceeds raised totaled $190 million, the highest level since Q1 2017.

Largest IPOs ($ in millions)

Pricing Date Issuer Deal Value Market Value Sector
9/11/19 SmileDirectClub Inc $1,346.4 $8,851.8 Healthcare
9/25/19 Peloton Interactive Inc $1,160.0 $8,102.3 Consumer
7/16/19 DouYu International Holdings Ltd $775.0 $3,733.2 Technology
9/18/19 Datadog Inc $745.2 $7,922.7 Technology
9/17/19 Envista Holdings Corp $677.2 $3,490.3 Healthcare
7/31/19 Dynatrace Inc $655.2 $4,486.6 Technology
9/12/19 CloudFlare Inc $603.8 $4,478.9 Technology
9/11/19 10X Genomics Inc $448.5 $3,718.6 Healthcare
7/24/19 Livongo Health Inc $408.5 $2,599.1 Technology
7/18/19 Medallia Inc $374.3 $2,611.1 Technology
Source: Dealogic

Average Aftermarket Performance of Each Month’s IPOs Through 9/30/19

36.7%
29.5% 28.4%

18.6% 20.2% 20.6%

18.1%
13.2%

2.8% 4.7%
1.7%

(6.6%)

Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

Source: Dealogic

Pricing vs. Filing Range

# IPOs Priced
22 6 7 1 9 7 16 24 19 17 4 12

59%
75% 84% 82% 75%
89%
100% 100% 100% 100% 100% 100%

41%
25% 16% 18% 25%
11%
Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19
Below Filing Range In or Above Filing Range
Source: Dealogic

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Follow-on Offering Overview – Third Quarter 2019
The third quarter saw 125 follow-ons raise $28 billion in total proceeds, a decrease from the previous quarter. Meanwhile,
convertible debt offerings continued to trend upward with 41 offerings priced raising $21 billion, the most since Q2 2018.
Bought deals—ones in which the underwriter acquires the entire offering—increased to account for 22% of all follow-on
offerings in the quarter as broader market volatility led issuers and selling shareholders to seek price assurances.
Annual Follow-On Activity ($ in billions)
750 640 $300
582 594 617
550 522
507
500 443 404 $200
395
343

250 $100

0 $0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

Follow-Ons Priced by Marketing Type

100%
13% 15% 14% 18% 18% 21% 21% 19%
23% 26%
80% 34%
22%
29% 34% 25% 23%
60% 36% 25% 30% 34%
33%
37% 22% 17% 24% 21% 36%
40% 19% 35% 36% 31%
27%
20% 34% 35% 34% 17%
28% 27% 33%
17% 13% 14% 12% 16%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD
FMFO (>3Days) ABB(<3Days) CMFO(Overnight) BD

Annual Convertible Debt Activity ($ billions)

150 133 135 131 $100
110 118
101 $75
100 82 87
77 77 77
$50
50
$25

0 $0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD

Converts Priced by Sector

100%
15% 16% 15%
29% 34% 28% 29% 29%
80% 39% 44%
50%
43% 39% 46%
60% 23% 23%
30% 34% 13%
26% 14%
8% 5% 6% 12%
40% 10% 8% 5%
14% 6% 7% 5% 3%
7% 26%
5% 19% 17% 28% 31%
18% 24% 30%
20% 11% 21% 31%
10% 10% 11% 5% 4% 9% 5%
13% 5% 8%
7% 4% 5% 7% 8% 1% 7% 4% 3%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019YTD
Consumer Financial Healthcare Services Industrial Technology
Source: Dealogic

5
 WILLIAM BLAIR EQUITY CAPITAL MARKETS INVESTMENT BANKING FRANCHISE

William Blair
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Drawing on our deep sector expertise and the strength of
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capital-raising objectives.

Recent transactions include:

$105.1
billion raised

19%
IPO market share

32%
of ECM activity is bookrun

Bookrun / Lead-Managed

* Equity Capital Markets activity

for the period January 1, 2015
through September 30, 2019

6
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