Click for full photo gallery: The IPO Class Of 2012
After a muted reception for Zynga�s Dec. 16 debut as a public company, tumbleweeds are blowing through the market for new stock offerings as the the IPO machine is recharging its batteries for the coming year, which comes on the heels of a seesaw 2011.
Following a rocky finish to the year, it may take some clarity on Europe�s sovereign debt crisis for the machine to rev back up, soothing market jitters and giving money managers some confidence to put cash to work in higher-risk assets, like, for instance, companies with no public track record.
Paul Bard, director of research at IPO investment advisory firm Renaissance Capital, highlights the dichotomy in an IPO market that has shifted back into a mode of �the haves and the have-nots.� While hot deals for high-profile companies will usually find buyers � think the recent offerings from the likes of Michael Kors, Zynga and Groupon� investors are reticent to invest in businesses that are reliant on a big upturn in economic growth, particularly in the developed markets.
Businesses in �secular growth industries or with strong global brands,� are in a class by themselves when it comes to going public, Bard says, at least in the current environment.
Gallery: The IPO Class Of 2012
Looking ahead is more useful if you know where you�ve been, so it bears considering how the IPO market performed in a 2011 that was something of a year of two halves. The market for new issues heated up in the first few months, with bubble-era leveraged buyout targets like HCA and Kinder Morgan going public alongside the new crop of technology companies including cloud names and the social media vanguard with the likes of LinkedIn.
�The real head-turning constituent in the market has of course been tech and social media,� says John Demler, from capital markets data and analytics provider Ipreo, �but the real strength continues to be in consumers and financials, plus the energy sector has been very active of late.�
While those sectors were able to bring deals to market, the landscape shifted in the second half. The S&P downgrade of America�s credit rating and the worsening sovereign debt crisis in Europe took stocks in general on a roller coaster ride and slammed the window shut on new issues. While a number of companies made it through the gauntlet, names like Groupon and Zynga broke below their IPO level.
In choppy markets, with little visibility on future growth in a macro sense, it is worth remembering that many portfolio managers would have to sell at least a piece of a current holding in order to buy a less-proven business in an IPO.
�In the past, investors wanted the historical IPO discount of 15-20%� compared with industry peers, Bard says. Now, particularly for the debt-laden, economically-sensitive businesses that are frequently owned by private equity firms, investors could want steeper discounts, he adds.
While financial sponsors have not yet reached the point where liquidity trumps valuation, the gap between buyers and sellers will remain until there is more clarity on the economy. That is why deals like Toys R Us and Caesars Entertainment have languished in the pipeline and why conditions that resemble early 2011 � when a number of PE deals priced � is likely necessary to drive a big spate of debt-laden deals.
Gallery: The IPO Class Of 2012
Of course, none of these issues affect the 800-pound gorilla in the IPO market, a certain social networking firm run by a Mr. Mark Zuckerberg.
Facebook is among a small cohort of companies in a high-quality growth bucket �that will get done in any market,� Bard says. If conditions in the equity market at large improve the window will open wider and more companies will be able to move toward the exit.
Those are likely to include companies that are already in the pipeline � names like AMC Entertainment, Party City, Kayak Software and ExactTarget � as well as many that have yet to file but are in the so-called �shadow backlog.� Names in that group include Dropbox, Gilt Group, Workday, Spotify and Glam Media, according to Renaissance Capital�s 2011 IPO Review.
At present though, turmoil in Europe, the fears of a hard landing and fresh memories of what has been a rocky year for IPOs � the average U.S. deal lost 11.8% in 2011 and 70% were under their offering price as of mid-December � will make at least the early part of 2012 a challenge.
�If recent trends are any guide for 2012, we might expect continued rapid opening and closing of the IPO window as volatility and a lack of clarity around Europe, China and U.S. politics persists,� according to Ipreo�s Demler.
Coming off a strange year � the second half is traditionally stronger, but more than 75% of U.S. deals priced before August 1 � the IPO market still has a reasonable, fundamentally-sound backlog of growth companies in addition to bubble-era LBOs and other PE-backed names.
Gallery: The IPO Class Of 2012
Ipreo�s backlog data (deals filed or amended in the last six months) shows more offerings are in the pipeline than a year ago, but aiming for smaller proceeds. The increase in smaller deals reflects the the fact that some companies that need capital cannot wait for prime conditions to go public. On the other end of the spectrum, the lack of big blockbusters suggests that PE-backed companies with the financial resources to wait out the market will do just that, if it means a better result for their sponsors down the road.
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