Another sign that the economy is improving: investment banks expect an increased number of initial public offerings of stock this year. And most of the IPOs are expected to come from the portfolios of private equity firms. That could give the venture capital industry a needed shot in the arm.
According to a study by accounting firm BDO USA, capital markets executives at leading investment banks predict continued growth in the number of initial public offerings (IPOs) on U.S. exchanges in 2011. About half of those surveyed said that most of the IPOs would come from private equity portfolios.
Close to three-quarters (72%) believe U.S. IPO activity will increase this year compared to 2010, with almost a quarter (24%) describing the increase as substantial.
Only nine percent of the survey participants expect a decrease in IPOs in 2011, while 19 percent forecast activity will be unchanged from 2010. Overall, bankers predict an 11 percent increase in the number of U.S. IPOs in 2011. They anticipate these offerings will average $268 million, which projects to more than $45 billion in total IPO proceeds (an increase of approximately 18%) on U.S. exchanges in 2011.
“With the number of IPOs on U.S. exchanges more than doubling in 2010, it isn’t surprising that investment bankers are forecasting more measured growth in the number of deals for 2011.
However, when you consider that the General Motors offering, by itself, accounted for more than 40 percent of all U.S. IPO proceeds in 2010, the projected growth in volume reveals a growing confidence in the capital markets community. Absent the GM IPO, the forecast would be calling for the amount of IPO proceeds to double in this year,” said Jay Duke, a Partner in the Capital Markets Practice of BDO USA. “This indicates a move to larger offerings in 2011.”
According to BDO USA Capital Markets Partner, Christopher Tower, “Sponsor-backed deals played a significant role in the strong growth of U.S. IPO activity in 2010 from both a volume and performance perspective. Capital markets executives clearly see this trend continuing in 2011, with almost half identifying PE firms as the main source for IPOs in the coming year.”
Strong majorities of investment bankers predict an increase in the number of IPOs in the technology (87%), energy (83%), biotech (65%) and healthcare (60%) verticals in 2011. This is consistent with the industries that were identified as growth leaders in last year’s study. By comparison, there is more modest support for the likelihood of growth in IPOs for industrial/manufacturing, financial and media/telecom.
Other major findings of The 2011 BDO IPO Outlook Survey:
- Price is Right. Despite the increase in IPO activity, the size of the average IPO in the U.S. was down significantly from 2009. When asked to explain the drop in size, half (50%) of the bankers cited reduced offering prices in a very discerning market, while 39 percent felt the offering companies were smaller businesses, in general. Others (8%) connected the smaller size to the use of a scarcity premium, whereby smaller offerings are used to create increased investor demand for the stock.
- The PE & VC Effect:
o Driving Growth. IPO activity on U.S. exchanges bounced back in 2010, more than doubling from 2009. The key drivers of this growth according to investment bankers were private equity (PE) and venture capital (VC) firms needing to deliver returns to clients in order to raise new funds (41%) and the near zero benchmark interest rates (24%) that increased demand for higher yielding assets. Stable financials at IPO businesses (22%) and the reduced price of offerings (12%) were also identified as drivers.
o Best Performers. Sponsor-backed IPOs (those backed by PE and VC firms) significantly out-performed other initial offerings in 2010, and I-bankers identified various drivers for this trend. More than a third (36%) cited the competitive pricing of the sponsor-backed offerings as leading to better performance and over a quarter (27%) indicated that these were generally more stable businesses with strong cash flow. One-fifth (21%) felt the sponsor-backed businesses were better prepared to rebound in a recovery, while others (15%) suggest that the IPOs benefitted from having less debt than past LBO offerings.
o PE to Lead 2011 IPOs. When asked what will be the greatest source of IPOs in 2011, almost half (47%) of capital market executives cite private equity portfolios. Spinoffs and divestitures (22%), venture capital portfolios (17%) and owner-managed, privately-held businesses (13%) are the other sources identified by the bankers.
Slight Dip in Returns. While U.S. IPO activity is predicted to increase, the bankers believe returns will run slightly below 2010. They forecast offerings achieving an average one-day return of 9 percent and an overall return average of 18 percent (compared to 2010 returns of 10% and 24% respectively).
Related Stories:
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- Survey predicts tech industry to lead IPO growth
- Investment bankers project slow growth in IPO action
- IPO market expected to gain momentum in Q4
- Report says: dearth of 2009 IPOs expected, but some could be successful
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