U.S. IPO Market Surges as Market Confidence Returns in Early 2013

As the U.S. housing market continues to see recovery, the real estate sector is dominating, bumping technology down, and boasting 18 IPOs that raised $11.0 billion. IPO returns for Q1 have also been strong with the 24 effective IPOs having an average of 12.7 percent return on the first day of trading compared with the 9.96 percent YTD total return for the S&P 500 index. In a recent EY survey of institutional investors^[1], they have responded in an overwhelming show of faith as 82 percent globally have invested in pre-IPO and IPO stocks in the past 12 months compared with only 18 percent in the past two to three years."There have already been far more IPOs than we anticipated in 2013. I think we are finally seeing a level of confidence return to the markets after a tumultuous few months following the U.S election and the fiscal cliff," said Herb Engert, Strategic Growth Markets Practice Leader for Ernst & Young LLP. "We're seeing positive signs for the IPO window to stay open. The Dow Jones industrial average hit an all time high earlier this month and investors look optimistically to the U.S. markets. In fact, over 50 percent of institutional investors rank the U.S. as a top three investment destination, and I expect that mindset to continue."

Looking Ahead:

For Q2 and the remainder of 2013 stability is key - a strong, steady stock market and potential clarity on tax hikes could make for a very solid IPO market this year. North American institutional investors cited the prospect of stabilization in macro-economic conditions as their number one concern for positive market sentiment at 65 percent followed by more stable equity markets at 61 percent and brighter corporate earnings outlook at 57 percent. However, there are still concerns around the stability of the European economy which continues to hinder global recovery.

Also, the number of new public registrants has been trending up. The IPO pipeline, clouded by the confidential filers, saw 25 new registrations enter into the public IPO pipeline since the first of the year, seven in January, 14 in February and four in March thus far; a strong indication that companies are lining up to access the capital markets while the IPO window is still open.

Pricing will also play a big role in IPO momentum. North American investors cite attractive pricing as the top success factor for an IPO at 90 percent while overpricing ranks as the top challenge at 85 percent. IPO valuation is driven by market confidence in the ability of a company's management team to execute their business plan and consistently deliver strong investor returns. There is no denying that investor confidence can be affected by market or industry volatility and economic uncertainty. But, there is always room in the market for companies with attractive pricing, a good management team, and the ability to clearly explain their business proposition to investors.

"The U.S. market environment in 2013 has presented a window of opportunity for IPOs, and we expect at least 9 more companies to go public before the quarter closes" said Jackie Kelley, Americas IPO Leader, for the global Ernst & Young organization. "Equity markets are reaching new highs, and valuations are very attractive. We expect continued investment in IPOs through 2013 given investors' positive sentiment towards public listings. The key question of timing will depend on when pre-IPO companies are ready to meet investors' terms and expectations and if the price is right."

PE-Backed IPOs

The year should be active from a PE perspective as sentiment is rapidly improving and PE-backed IPOs have performed well. Currently, there is a significant backlog of companies in the "PE portfolio," many of which were acquired over the 2006-2007 timeframe. Nonetheless, PE firms have been highly disciplined and opportunistic in their exit strategies, and that should continue to be the case. There is also a significant pipeline of PE-backed companies waiting to IPO. Through March 15th, there were more than 48 PE-backed companies in active registration that could potentially raise more than $9.0 billion.

While the window is open, firms will IPO, but to the extent that increased volatility starts to drag valuations, firms will explore alternatives - through sales to strategics, secondary buyouts, and in particular through the credit markets, which are extremely open and can allow PE firms to achieve some liquidity for their LPs.

In the U.S, PE-backed IPOs are on the rise with six deals going public already this year raising $1.4 billion. In 2012, the U.S. saw 68 PE-backed IPOs go public raising $14.5 billion.

Venture Capital backed IPOs on the other hand have trended down during the past few years yet better exits and returns of late suggest the slump in fundraising could be over for VC in 2013. An uptick in VC inflows this year would obviously not be enough to reverse the recent declining trend; however, an improvement would bolster investor confidence and prospects for future capital raising.

Year-over-year pipeline comparison chart or table: