Submitted by BDO USA
CHICAGO “ According to a new study by BDO USA LLP one of the nation leading accounting and consulting organizations, there is little agreement among capital markets executives at leading investment banks when asked to forecast U.S. initial public offerings (IPOs) during the remainder of 2012. The bankers are relatively evenly divided among those that predict an increase (33 percent) in the number of IPOs on U.S. exchanges, and those that are forecasting flat (36 percent) or negative growth (31 percent). Overall, banker sentiment suggests that there may be virtually no net change (0.2 percent), with the latter half of 2012 matching the first half in the number of U.S. IPOs. They anticipate these offerings will average $221 million in size, which projects to more than $43 billion in total IPO proceeds on U.S. exchanges in 2012.
Global political and financial instability (59 percent) was, by far, the most often cited threat to the U.S. IPO market in the second half of the year. The uncertainty of the presidential election (20 percent), the threat of government spending cuts (9 percent), constrained bank lending (6 percent) and continued high unemployment (6 percent) were the other threats mentioned.
When asked which of the U.S. presidential candidates would be better for the U.S. IPO market, almost three-quarters (72 percent) of the capital markets community chose Republican challenger, Mitt Romney, over President Barack Obama (15 percent). The remaining bankers (12 percent) expressed no preference between the two candidates in terms of impact upon the U.S. IPO market.
IPO activity on U.S. exchanges increased steadily during the first quarter of the year and carried solid momentum through April before renewed concerns with the European debt crisis, negative U.S. economic data and the problematic Facebook IPO sent markets spiraling downward and brought new offerings to a halt, said Wendy Hambleton, a partner in the capital markets practice of BDO USA. Based on this survey, the capital markets community is clearly concerned that economic turmoil overseas will keep markets volatile, making for a challenging time to conduct initial offerings.
Absent the Facebook offering, the size of the average IPO in 2012 is running considerably smaller than 2011, and capital markets executives identified several contributing factors for this trend. The most frequently cited factor is the absence of any major deals (prior to Facebook) to pump up the average (38 percent). However, similar numbers of bankers cited the much smaller deals being churned out by private equity firms in 2012 (35 percent) and valuation pressures that forced offering businesses to cut prices (27 percent).
U.S. Will Continue to Lead IPO Proceeds
In a continuation of a trend that began in 2011, U.S. exchanges are playing a larger role in the global IPO marketplace in terms of total proceeds. Forty-three percent of the investment banking community see U.S. exchanges continuing to increase their percentage of global IPO proceeds during the remainder of the year. More than a third (36 percent) believe it will remain steady and approximately one-fifth (21 percent) see the U.S. share declining in the second half of 2012.
When asked to identify the main reason for the sharp increase in the U.S. share of global IPO proceeds, the bankers emphasized the impact of the debt crisis on European offerings (39 percent) and the strength of offerings from the U.S. technology sector (31 percent), with comparatively less impact being associated with the continued flow of deals from U.S. private equity firms (15 percent) and the lack of offerings from Hong Kong and China (14 percent).
Thus far in 2011, the technology sector has led all industries in U.S. IPOs and almost three-quarters (73 percent) of investment bankers predict even more tech offerings during the second half of the year. A majority see the numbers of IPOs from the energy (61 percent), healthcare (55 percent) and biotech (54 percent) verticals increasing as well. No other industries came close to receiving a majority of support for the likelihood of growth in IPOs during the remainder of the year (see full chart below).
Industry Increase Flat Decrease
Technology 73 percent 18 percent 9 percent
Energy/Natural Resources 61 percent 23 percent 16 percent
Health care 55 percent 27 percent 18 percent
Biotech 54 percent 36 percent 10 percent
Real Estate 38 percent 38 percent 24 percent
Media/Telecom 33 percent 41 percent 26 percent
Financial 27 percent 39 percent 34 percent
Industrial/Manufacturing 25 percent 50 percent 25 percent
Consumer/Retail 16 percent 43 percent 41 percent
(Proportions of Capital Markets Executives expecting IPO activity to increase, remain stable or decrease in specific industries during remainder of 2012.)
These are just a few of the findings of the 2012 BDO IPO Halftime Report survey which examines the opinions of 100 capital markets executives at leading investment banks regarding the market for initial public offerings in the United States during the second half of the year. The survey was conducted in June of 2012.
Other major findings of the 2012 BDO IPO Halftime Report:
Pre-IPO Marketplaces. Despite SecondMarket recent announced layoffs of 10 percent of its workforce, more than two-thirds (69 percent) of I-bankers believe private, pre-IPO marketplaces are here to stay. A majority (66 percent) of the investment banking community feel these private marketplaces are having a positive influence on the U.S. IPO market, but that is a significant drop from last year when more than three-quarters (79 percent) of the bankers were positive towards the pre-IPO markets.
Sizing up IPOs. U.S. IPOs have averaged $405 million in 2012, but only $176 million if you exclude the Facebook offering. When asked to estimate the size of the average IPO for the remainder of the year, the bankers prediction came in at $221 million. This net increase of $45 million, excluding Facebook, may reflect optimism about average deal sizes for the balance of 2012.
First Half Deal Drivers. When asked to identify the key drivers in U.S. IPO activity in early 2012, investment bankers cite previously postponed offerings that moved forward as the economy improved (35 percent) in late winter and early spring, while others focused on low interest rates increasing investor demand for higher yielding assets (28 percent). Other drivers cited were private equity and venture capital firms needing to reduce debt and deliver returns to clients (24 percent) and the positive performance of early IPOs encouraging more businesses to make offerings (13 percent).
The Source of IPOs? When asked what will be the greatest source of IPOs in the second half of the year, almost two-thirds (65 percent) of capital market executives cite either venture capital (36 percent) or private equity (29 percent) portfolios. Owner-managed, privately held businesses (20 percent) and spinoffs and divestitures (15 percent) are the other sources identified by the bankers.
The BDO IPO Halftime Report is a national telephone survey conducted by Market Measurement Inc., an independent market research consulting firm, whose executive interviewers spoke directly to capital markets executives, using a telephone survey conducted within a scientifically developed, pure random sample of the nation’s leading investment banks.
BDO USA is a valued business adviser to businesses making a public securities offering. The firm works with a wide variety of clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on a myriad of accounting, tax and other financial issues.
About BDO USA
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