Wednesday, June 30, 2010

IPOs – Reason for Optimism?

From Piper Jaffray Private Equity Partners Market Update, Second Quarter 2010:
The IPO market in 2010 is off to a pretty good start. Year-to-date, there have been 53 IPOs, raising a total of $8.4 billion. This compares to 11 IPOs for $2.2 billion for the same period last year.
Early in the year, you could sense the optimism within the private equity community that the IPO window would reopen in 2010. While January and February were a little slow, March, April and May each produced a minimum of 11 IPOs and $1.3 billion raised. So far, June is slightly behind that pace (seven IPOs pricing through June 25) due to the market turmoil caused by the European debt crisis and perhaps recent post-IPO price performance. The class of 2010 IPOs is down an average of 3.5 percent versus a virtually flat year-to-date return for the S&P 500. Twenty-one of the 53 IPOs so far in 2010 are down more than 10 percent from the offer price and only 22 have traded up (as of June 25).
Regardless, the IPO backlog of companies in registration continues to grow, a sign that bankers and sponsors expect a robust IPO market in the coming months. There are currently 127 IPOs in registration, up from a low of 33 in August 2009. Most of them look viable. Less than 30 percent of the backlog is growing stale (more than four months old).
We have learned the following from recent discussions with institutional buyers of IPOs:
There is a strong demand for growth stories, which should bode well for VCs.
There appears to be less interest for LBO-backed IPOs. While institutional investors are still willing to participate in LBO-backed IPOs, they have become very price-sensitive. During the 2006–2007 boom of LBO-backed IPOs, the buyers were more apt to accept the valuation being pitched by the bankers. Today, investors are crunching the numbers themselves and telling the bankers where the deal needs to price. This is evidenced by nearly 50 percent of IPOs in 2010 pricing below their filing range, the highest percentage in years.
With few exceptions, the bar remains high for an IPO. Growth, profitability and predictability are the ingredients investors require. Median revenue for 2010 IPOs remains over $100 million while the median EBITDA is $24 million.
We anticipate the IPO market to remain choppy as investors continue to digest news of the global economy and the price performance of recent IPOs. An uptick in either category may add the necessary confidence to both issuers and investors to create a more steady flow of IPOs in the second half of the year.
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