U.S. IPO Calendar is Light for Q4, Yet Strong Earnings Reports Elevate IPO Performance

NEW YORK, Dec. 11, 2012 /PRNewswire/ -- A recent string of strong earnings reports could add a few deals to the pipeline before the end of 2012.  However, with only one effective IPO so far this month, the largest commercial REIT in history being acquired, and five companies withdrawing their offerings in late November, December is on track to have its slowest month since 2008, according to Ernst & Young's U.S. IPO Pipeline Analysis.

"Despite so many challenges this year, including the U.S. election, continued uncertainties around the global marketplace, and turmoil over the US Fiscal Cliff, 2012 will go down in the books as a solid year for IPOs, and much stronger than 2011," said Herb Engert, Strategic Growth Markets Practice Leader for Ernst & Young LLP, @HerbEngert. "I see uncertainty continuing to hold us back slightly, but I do think IPOs will rebound in 2013 after a slow few months ahead."

Year in Review:
The year got off to a good start in Q1, but momentum shifted over Q2 and Q3 due to persistent economic uncertainty, May Eurozone turmoil, slower growth in emerging markets, a looming fiscal cliff and leadership changes in both the U.S. and China. After two declining quarters, Q4 brought an IPO rebound with 30 transactions, an increase from 26 in Q3. Four IPOs seeking approximately $985 million in proceeds are scheduled to price in coming weeks. October stood out as the busiest month of 2012 raising the most proceeds with 21 IPOs and more than $6 billion in capital.

Both IPO volume and value in 2012 surpassed 2011. As of December 7, 2012,130 IPOs on US exchanges raised more than $45 billion in proceeds compared to 124 IPOs and $40 billion in 2011. Volume is up to 30 from 27 during Q4 2011. Total proceeds in Q4 2012 increased to $7.7 billion compared to $7.5 billion in the Q4 last year. Overall, the equity market has performed better this year and the S&P 500 index increased 12.5% in 2012 year-to-date versus a loss of 1.1% for 2011. To hedge against global economic unsteadiness, more foreign investors plan to look to the US for growth in 2013 and deal value for inbound M&A increased by 26% to $137.2 billion. The US is the number two investment destination for the next 12 months, just behind China, up from fourth place a year ago.¹

Private equity has remained stable amidst corporate decline and saw a considerable improvement in exits, both through M&A and IPO. PE firms are sitting on more than $360 billion in "dry powder" to deploy, but there is a shortage of quality assets and a noticeable gap between buyer and seller price expectations, which have constrained activity.   As a result, buyout firms have struggled to attain a consistent level of activity. Fundraising has been fairly active in 2012, and PE activity is expected to continue momentum and remain consistent with 2012.

JOBS Act, Confidential Filers and the Pipeline:
Passed in April to help bolster small business, the U.S. Jumpstart Our Business Startups (JOBS) Act has gained momentum as more companies take advantage of its provisions. Seventy four percent of new IPO registrations since April are classified as Emerging Growth Companies (EGCs), and represent companies with under $1 billion in revenue. Additionally, based on disclosed information, 54% of EGCs have taken advantage of the ability to file confidentially. Monthly data shows that confidential filers have accounted for 40% and up to 82% of total IPO registrations. This shows that management teams are taking the opportunity to test the waters without being in the public eye. The JOBS Act has altered the appearance of the pipeline due to companies filing confidentially-to this end 2011 showed a stronger pipeline.

According to Ernst & Young data:

• Among 57 US EGC IPO registrations from April to December 7, 2012, 47%, or 27, went effective, while 40% or eight of the 20 non-EGC registrations went effective.
• Among the 27 EGCs whose IPO went effective, the average first day returns for the 16 confidential filers was 18.0% compared to a 17.3% return for the eleven traditional filers.
• Smaller companies are more likely to include only two years of financial information. Thirty nine percent of EGC IPOs who provided two years or less of financial information had average revenues of $49.9 million while 61% of EGC IPOs who provided more than two years of financial information had average revenues of $226.8 million.

Top sectors:
Similar to 2011, the top three sectors for IPO companies in 2012 are Technology, Oil & Gas and Life Sciences. This is also true for Emerging Growth Companies. These sectors will continue to lead the IPO market in the first half of 2013. As the U.S. housing market continues to see recovery, the Real Estate sector is expected to rebound. There are currently 18 Real Estate IPOs in the pipeline seeking to raise more than $12 billion in capital. The S&P Case-Shiller Home Price Index has been on the rise since January 2012.

Sector Breakdown:

• 35 technology IPOs and $20.6 billion in capital accounted for 27% and 46% of this year's total, respectively. Almost half of firms are software companies.
• 21 oil & gas IPOs raised more than $7.2 billion this year. More than half of the oil & gas firms are LPs.
• Life sciences IPOs accounted for 10% or 14 of the total volume and 2% or $886 million of the total proceeds.

Conclusion
"We expect 2013 to be on par with 2012 in terms of deal size, and the sectors that will be in play," said Jackie Kelley, Americas IPO Leader, for the Ernst & Young organization. "Resolution on the Fiscal Cliff and a strong retail season could drive a boost in the pipeline late in the quarter and early into 2013."

"A trend we will continue to see in Q4 is companies pursuing a follow-on offering, looking to raise capital. This will challenge the IPO market going forward as new companies in the pipeline will compete for attention and capital with companies that already have a proven track record," concluded Kelley.

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¹ Ernst & Young US Capital  Confidence Barometer, October 2012

SOURCE Ernst & Young