U.S. IPO Pipeline Slows Due to Confidential Filings Under JOBs Act and Investor Uncertainty

NEW YORK, June 27, 2012 /PRNewswire/ -- According to Ernst & Young's U.S. IPO Pipeline Analysis, IPOs issued in Q2 rose an average of 8.8% as of June 22, compared to a 23.2% average for IPOs issued in Q1. The report also showed that despite market pressure on IPO valuations, first-day average returns for the 26 companies that came to market were in the double digits. Overall, average post-IPO return ending in June for Q2 IPOs still outperformed the overall market by approximately 14.8%.

Excluding REITs, closed-end funds, SPAC and OTC issues, total US IPOs in the pipeline dropped from 164 in Q1 to 132 in Q2.  Due to confidential filings under the JOBS Act and investor uncertainty, Q2 saw a lower number of registrants, 24 vs. 44 in Q1.  There was also an increase in the number of IPO withdrawals, 18 in Q2 vs. 10 in Q1.

"With four IPOs ready to price, it appears the market window has opened despite some turmoil this quarter," said Jackie Kelley, IPO Leader for Ernst & Young LLP.  "However, windows can close as quickly as they open. Therefore it's very important for companies to prepare in advance and be ready to go public when the timing is right for them."

Year-over-year pipeline comparison:

The Q2 Review: Pipeline Thins Yet IPO Performance Up

In Q2, out of the 26 IPOs, 17 (or 65%) priced at or above their price range, while 9 (or 35%) were priced below their expected range.  Many companies lowered their price range and IPO size due to the volatile market condition. With the $16 billion Facebook IPO out of the pipeline, Average IPO size in the pipeline fell 10% to $175 million in Q2 from $195 million in Q1.  Over two-thirds (88 registrants) are seeking $100 million or more at the end of Q2.

During the second quarter, 26 effective IPOs were issued, a decrease of 33% from Q1, but equal to those issued in 4Q 2011.  Of the 26 IPOs priced, 12 (or 46%) had positive returns, and the overall average return was 8.8%. 

Notable Q2 companies that priced include:

• Oaktree Capital Group, LLC, priced at $43
• Facebook Inc., priced at $38
• SandRidge Mississippian, priced at $21
• Tumi Holdings, Inc, priced at $18
• Splunk Inc., priced at $17
  

A sector breakdown of the 132 IPOs currently in the pipeline show that 28 (or 21%) are in Technology, 20 (or 15%) are in Oil & Gas, and 11 (or 8%) are in Pharmaceuticals. Diversified Industrial Products and Professional Firms & Services round out the top five sectors.  Together, the top three sectors for new IPO registrations, Technology, Oil & Gas and Pharmaceuticals include 59 registrations, or 45% of total registrations.

Regionally, California continues to lead deal volume with 24 companies seeking $2.3 billion; followed by Texas with 12 companies seeking $3.4 billion; and Illinois, Massachusetts each with 8 companies seeking $1.4 billion and $966 million, respectively. China has 6 companies seeking $370 million.  As of Q2, 17 or 13% of the companies registered to go public are from foreign countries and a majority are from China.

What's New: The JOBs Act impact on the Pipeline:

It is still too early to determine the actual impact of the JOBs Act on the IPO pipeline and registrations. The bill, passed in April 2012, eases some of the regulatory requirements on companies seeking access to capital from both the private and public markets. As part of the bill, and a major change from current practice, Emerging Growth Companies with annual gross revenues of less than $1 billion are now able to submit IPO registration statements and amendments to the SEC on a confidential basis. In addition, they do not have to publicly disclose that they are going public until 21 days before their IPO roadshow. Interestingly, since the bill passed, thirteen or 65% of new registrations that have filed their S-1 in Q2 have less than $1 billion in revenue.

"The ability to file confidentially as a result of the JOBS Act now makes it challenging to gather a complete picture of the IPO pipeline or have a sense for when the companies that filed confidentially will choose to test the market", added Herb Engert, Strategic Growth Markets Practice Leader for Ernst & Young LLP, @HerbEngert. "We're working with a 'new normal' regarding the transparency of the pipeline."

Sector Highlight: Investors Flock to Oil & Gas

The five effective Oil & Gas IPOs in Q2 with an average deal size of $478 million raised close to $2.4 billion in proceeds and attracted the most capital from investors.  The five new registrations in Q2 are expected to raise more than $1.6 billion; the 20 IPOs in the pipeline are seeking to raise $5.1 billion.  This puts the Oil & Gas average deal size at $255 million -- 2.5 times greater than the $100 million overall average.  Limited partnerships make up about 40% of the Oil & Gas companies accessing the IPO market in the pipeline. However, the three largest IPOs this quarter are from companies in energy equipment services and exploration.

Trends show continued M&A activity in the sector at levels consistent with the past few years-excluding 2009 due to depressed commodity prices. Private equity also remained active in the sector with a mix of corporate and asset deals and transactions included divestitures and acquisitions by both corporate and PE buyers.

Unlike the overall market and other sectors, Oil & Gas did not see much slowdown in effective IPOs.  Five issues were effective this quarter, compared to four during Q1 but there is a downtrend in new registrations, with only five IPOs entering the pipeline this quarter versus eight in the prior quarter.  The five effective IPOs this quarter only delivered an average post return of 1.1% -a clear sign that uncertainty still guides the tempo in the sector. Issues at the forefront include:

• The presidential election and uncertainty around future tax issues, and energy policy
• Indecisive forecasts for demand of oil on a global level
• Euro zone debt crisis
• Continued depressed U.S. natural gas pricing

Ernst & Young U.S. IPO Pipeline analysis is issued quarterly as a forward-looking indicator of the IPO market.  The IPO Pipeline data is refined to eliminate bias from financial services organizations; real estate investment trusts (REITs) and other holding companies that represent assets under management instead of core businesses.  It also eliminates any registrations sitting on the books for more than 12 months – long-term applicants that may bloat numbers, but don't reflect current market trends.

Earlier this month Ernst & Young hosted an IPO webcast with a panel of research analysts, institutional investors, and moderated by Jackie Kelley for an interactive discussion on best practices for going public. Topics included: how to garner and retain investment and coverage; learning the metrics that institutional investors use to determine what companies they will invest in and how much; and developing qualitative components that can make a company's story compelling to investors.

Ernst & Young also developed the IPO Center of Excellence (COE) – designed to showcase the organizations full slate of IPO tools so that EY clients on the path to file for an IPO begin the process fully prepared. Using data from both Ernst & Young and Dealogic, clients will be able to analyze IPO activity by stock exchange, industry and geography.

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SOURCE Ernst & Young