The frozen market for initial public offerings won’t thaw in 2009 — or even the year after that, according to Bernstein Research. Bernstein’s analysts say they do not expect the market for new stock sales to bottom out until 2010 at the earliest, followed by a modest recovery.
If they are right, the result will be less fees for underwriters like Goldman Sachs and Morgan Stanley and hard times for companies and venture investors that have been patiently waiting to cash out by going public.
Companies tend to go public when stock markets are rising, volatility is low and equity fund flows are healthy. That clearly was not the case in 2008, as the global credit crisis roiled world markets and sent investors fleeing to the sidelines.
Last year, the number of initial public offerings experienced a huge downswing, with total I.P.O. volume declining 45 percent compared with the previous year. A record-setting 86 I.P.O.’s were canceled, and the average size of the I.P.O.’s shrank significantly.
Equity capital markets professionals at the investment banks shouldn’t expect a quick recovery, Bernstein says. Based on an analysis of historical data, Bernstein said it expects I.P.O. volumes to fall an additional 25 percent in 2009, followed by a 10 percent decline in 2010. This implies a 60 percent peak-to-trough decline in I.P.O. volumes from 2007 to 2010.
These predictions of an extended drought come as investment banks are suffering slowdowns in nearly every other segment of their business (merger advice, convertible and risk arbitrage, prime brokerage, asset management and retail brokerage).
Equity underwriting is one of the highest-margin businesses on Wall Street. Goldman Sachs and Morgan Stanley each generated about 4 to 5 percent of their total revenues from equity underwriting. That profit center will be taking quite a hit. Bernstein expects combined equity underwriting revenues for the two firms to decline by 35 percent annually in 2009 (after a 19 percent drop in 2008) and then fall by another by 5 percent in 2010, before a modest recovery of 15 percent in 2011 and 2012.
And then there are the private equity shops and venture investors that hoped to cash out of their investments and take their portfolio companies public.
The money these firms have wrapped up in their current investment will have to stay put until the I.P.O. market recovers, meaning there will be less money available for new projects. Entrepreneurs, who fear the shortage of funding could stifle innovation, are surely hoping Bernstein’s dire predictions don’t pan out.
– Cyrus Sanati, NYT DealBook, January 7, 2009