US IPO Market – 2012 Annual Review

After the fastest start since 2000, with the most anticipated deal in years on the horizon, the US IPO market entered May in prime

condition. However, the European debt crisis intervened yet again, and a market decline turned into a month-long drought for IPOs following Facebook’s botched offering. Deal activity returned sporadically in the second half, but uncertainty surrounding the fiscal cliff resulted in a disappointing end to the year, with the second-slowest November and December since the tech bubble. Still, the overall results showed an improvement over last year. With $43 billion raised, total proceeds were at the highest level since 2007, and the 21% average total return was above market indices. Consumer companies, such as organic food maker Annie’s and discount youth retailer Five Below, and enterprise software providers, most notably Guidewire and Workday,

produced some of the best-performing deals. After starting the year at a record high, the pipeline was cut in half largely due to the passage of the JOBS Act, which allowed smaller companies to file confidentially and created a large shadow backlog.

Key Takeaways:

  • IPO proceeds rise, helped by mammoth $16 billion Facebook deal
  • 14% average first-day pop is best in a decade
  • Search for growth creates diverse group of top performers
  • Private equity deal flow rises but lack of large deals causes proceeds to fall 50%       Facebook marks biggest venture capital-backed deal in IPO history
  • Investors favor LPs and LLCs in search of yield
  • Confidential filings under JOBS Act reduce pipeline visibility

US IPO activity improves marginally in an up-and-down year

In an up-and-down year that started off strong but ended with the second-slowest November and December since the bubble, the

US IPO market was modestly more active in 2012, with 128 deals, up 2% from last year. Total proceeds were up 17% but fell 27% excluding Facebook. IPO activity consisted mainly of smaller deals, as the median deal size dropped 23%. Perhaps indicating a paradigm shift, despite three years of recovery, US IPO activity still has not returned to the historical norm of 150 to 200 annual deals, as the market continues to react strongly to external shocks. Excluding a handful of record IPOs – GM in 2010, three mega private equity-backed IPOs in 2011 and Facebook in 2012 – annual proceeds from US IPOs would have trended below $30 billion.

Technology continues to dominate activity while financial deal flow jumps

Technology was once again the most active sector, accounting for 30% of deals and 48% of proceeds. Deal flow from the financial sector jumped this year, representing 16% of deals and 19% of proceeds, as new financial institutions sought to capitalize on dislocations caused by the financial crisis. The energy sector also made a strong showing, accounting for 20% of deals and 17% of proceeds, as investors snapped up yield-offering LPs and LLCs.

JOBS Act and proliferation of confidential filers stunt pipeline growth

The JOBS Act went into effect on April 5, allowing smaller companies to file confidentially and thus reducing the visibility into IPO filing activity. Only 140 new filers entered the IPO pipeline in 2012, down materially from 257 in 2011 and 253 in 2010. The current pipeline has 117 companies seeking to raise a total of $35.7 billion, down from 146 companies and $45 billion at the end of the third quarter. Of the 117 companies in the pipeline, 49 are considered to be active, having filed an amended document within the past 90 days. The shadow pipeline of companies that have filed confidentially with the SEC could range anywhere from 60 to 100 companies. Among the recent actual IPO filers, notable companies include the American unit of retirement, investment and insurance company ING, Bright Horizons Family Solutions, which offers work site child care and early education centers, and Zoetis, Pfizer’s animal health unit, which is expected to launch in early 2013 and could raise as much as $4 billion.

Enterprise software company AppSense, traffic data provider Inrix and sandwich shop chain Potbelly Sandwich are among a list of companies that have tapped banks in preparation of an IPO. MGM Holdings and Violin Memory have already submitted confidential filings. SpaceX could be Elon Musk’s third IPO attempt in four years, after Tesla Motors (June 2010) and SolarCity (December 2012). Overall, our proprietary Private Company Backlog holds nearly 180 companies, with strong representation from e-commerce and enterprise software firms.

Facebook makes up for fewer billion-dollar deals

Facebook’s much-anticipated offering headlined IPO activity in 2012. It raised $16 billion in proceeds (38% of total), making it the third-largest US IPO of all time, behind Visa and ENEL, and the seventh-largest global IPO on record. Facebook’s mammoth deal more than made up for the drop in billion-dollar IPOs this year (four compared to six in 2011). Other major 2012 offerings include the dual listing of Santander’s Mexican division and Apollo-backed Realogy, the largest real estate brokerage in the US.

Facebook and poor performance put hiatus on Internet IPOs

A total of 13 Internet IPOs raised an average of $90 million (excluding Facebook), representing 43% fewer deals than in 2011. The year started out strong with seven deals pricing in the 1Q12 compared to four in the 1Q11. However, Groupon and Zynga, which went public in late 2011, suffered massive declines in 2012 (both down 76%), which, combined with Facebook’s mismanaged offering in May, deterred potential Internet companies from moving forward with their IPOs. There were only five post-Facebook Internet IPOs, four of which were completed after August.

Facebook IPO highlights down year for venture capital

Facebook was the biggest VC-backed deal in IPO history and drove a 163% increase in VC proceeds year-over-year. However, excluding Facebook, VC-backed IPO activity was down 16% in terms of deal flow and 43% in terms of proceeds. Excluding Facebook, the average deal size was $104 million, down 32% from 2011. Internet IPOs were the biggest detractors for VC-backed IPOs as the number of deals fell 33% year-over-year and represented 26% of deal activity compared to 35% last year.

Technology continues to dominate activity while financial deal flow jumps

Technology was once again the most active sector, accounting for 30% of deals and 48% of proceeds. Deal flow from the

financial sector jumped this year, representing 16% of deals and 19% of proceeds, as new financial institutions sought to capitalize on dislocations caused by the financial crisis. The energy sector also made a strong showing, accounting for 20% of deals and 17% of proceeds, as investors snapped up yield-offering LPs and LLCs.

Chinese IPOs curtailed for second straight year

Chinese IPOs reached their lowest levels since 2003, with only two deals completed, representing an 83% decline from 2011 and a 95% decline from 2010. Investors continued to be wary due to the breakout of fraud in 2011 and, more recently, SEC investigations of Chinese auditors. Also contributing to the abatement was an economic slowdown in China, as evidenced by the lack of deals listing on the Hong Kong and Shanghai exchanges. Both US listings this year, however, had strong showings for the year as flash sales website Vipshop (+174%) and social platform YY (+36%), potentially giving other Chinese companies confidence to move forward with US IPOs in 2013.

Investors favor LPs and LLCs in search of yield

LP/LLC deal activity reached its highest point in the last nine years, benefitting from yield-hungry investors who were forced by Fed policies to seek dividend-paying stocks, in many cases yielding over 6%, rather than bonds. While deal flow was up only slightly, proceeds increased 81% due to a 68% rise in average deal size to $315 million compared to $187 million in 2011. Notably, all but one 2012 LP IPO came after June 1 and the last three deals added to the 2012 calendar were yield plays.

US IPO Index dragged down by Facebook, lags benchmark in 2012

The FTSE Renaissance US IPO Index (IPOS), a measure of post-IPO performance, rebounded from a weak 2011, but underperformed domestic equity benchmarks with a 12% return in 2012 (Russell 3000: 14%). Positive returns were primarily driven by industrial and consumer stocks, which contributed a combined 8% to overall index returns. Strong performers include LinkedIn (+82%), Delphi Automotive (+78%), Michael Kors Holdings (+87%) and General Motors (+42%). Facebook was, by far, the index’s largest detractor as the social network’s post-IPO decline subtracted 1% from index returns.

Is IPO volatility here to stay?

Now three years into the recovery, the IPO market remains well below the levels seen in the last cycle. The average deal count of 136 in the last three years is well below the 205 average of 2004 to 2007. Over the last decade, the IPO market has become increasingly captive to the underlying stability and trends of the overall equity markets. When major exogenous events, such as the European debt crisis and the fiscal cliff, roil the securities markets, IPO activity slows or shuts down altogether (e.g. August- October 2011 and May-June 2012). US IPO activity has also been below the levels we would expect in a normal economic rebound because of the tepid nature of the current recovery (unusually slow GDP growth and ongoing high unemployment) despite unprecedentedly expansionary monetary policy. The JOBS Act, which was touted as a way of opening the IPO market to small growth companies, has had no noticeable effects other than reducing the minimum time from filing to pricing. Without more structural changes, we are less optimistic that the JOBS Act in and of itself will solve some of the issues facing the US IPO market. The good news is that the IPO backlog, including the large shadow backlog, continues to grow, and IPOs by smaller companies actually rose in 2012. To see a good year in 2013, the IPO market will need not only a constructive resolution to the fiscal cliff, but also a steadier recovery in the broader equity markets.

 

Source: Renaissance Capital is the leading provider of institutional research, valuation and analytical tools for assessing upcoming IPOs and tracking the global IPO market. The Firm maintains the FTSE Renaissance Global IPO Index Series and provides IPO-focused investment management services through the Global IPO Fund (IPOSX) and separately-managed accounts.

 

 

 

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