By Ann Meyer
The bull IPO market that many were predicting a year ago might take a bit longer to materialize.
While Groupon made headlines when it raised about $800 million in a November public offering that valued the company at $10 billion, making it the largest initial public offering by a U.S. Internet company in years, the U.S. market for public offerings in 2011 fell short of most experts’ predictions. In Chicago, four companies went public in 2011, even with 2010, and nine have plans for offerings in 2012, Crain’s Chicago Business reported Jan. 2.
Nationwide and globally, however, the number of IPOs fell in 2011 from 2010, Crain’s said. The European debt crisis, coupled with high domestic unemployment and slow economic growth, contributed to ongoing uncertainty, said Lee Graul, partner at BDO USA in Chicago. And the latest BDO IPO Outlook survey, conducted in early December, indicates bankers’ confidence has yet to rebound.
A bearish forecast
About half of investment bankers surveyed were predicting an increase in U.S. IPOs in 2012, compared with 72 percent who predicted an increase a year ago. About 35 percent said the market would be flat in 2012 and 15 percent predicted a decrease in offerings.
Most pegged the average size of initial public offerings at $291 million, up slightly from the average of $268 million projected a year ago, and significantly larger than typical IPOs in other economic periods.
Companies going public on U.S. exchanges in 2012 are likely to be backed by private equity or venture capital, as they were in 2011, Graul said. “We’ve found private equity and venture capital were the main sources of the transactions for the third consecutive year,” he said. More than 40 percent of IPOs are expected to come from private equity portfolios in 2012, followed by 20 percent from venture capital portfolios, the study said.
Waiting out the economy
Many venture capital investors have been waiting out the economy and holding on to portfolio companies longer than usual, resulting in more mature companies going public. “[The investors] haven’t been able to get their money out of their investments since 2008 or 2009,” Graul said. To the extent that venture capital and private equity investors are able to sell portfolio companies through IPOs this year, they will have more capital to invest in new ventures, he said.
Despite the study’s bearish forecast, Graul pointed out that the stock market picked up during the last two weeks of 2011 and could lift investor confidence in 2012. “Things change quickly on Wall Street. It’s all psychology,” he said.
What it takes
Companies likely to find success on the public markets will be able to show long-term growth potential, stable cash flow and profitability, the study said.
Technology, energy and health-care businesses are most likely to find success through U.S. IPOs, the study said. But even those sectors experienced a decrease in confidence in the survey, with 73 percent of bankers projecting an increase in technology IPOs in 2012, down from 87 percent who forecast an increase when asked a year ago. Bankers showed increased confidence in only the media/telecom sector, where 39 percent are forecasting an increase in IPOs in 2012 compared with 35 percent who were bullish on the sector a year ago.
Foreign markets beckon
Smaller firms wishing to go public in 2012 might consider exploring foreign exchanges, which can be more accessible to startups, Graul said. “There is an opportunity for people to look offshore for funds these days,” due to the lower cost of capital and less regulation, he said.
Firms that can’t generate interest on U.S. exchanges or that flinch at the compliance requirements in the United States might find foreign exchanges more appealing. Exchanges in Singapore, Hong Kong and Canada “have been more receptive to offerings,” he said.
At the same time, the U.S. exchanges generally command a higher share price. “You might be able to raise more money doing a U.S. offering than in these other markets,” Graul said.
Last update Jan. 4, 2012