The U.S. IPO market started last week strongly, with two 30%-plus gains, but ended the week on a down note. Of eight deals scheduled, three suffered first-day losses, one delayed its deal, and two others postponed their offerings. The upcoming IPO calendar also contracted as only one company, mortgage REIT Orchid Island Capital (ORC), set terms. At the same time, 3D printing company ExOne (XONE) and wood products manufacturer Boise Cascade (BCC) priced above the range and traded strongly. It is unclear if this week's performance represents any changes in the underlying health of the IPO market, as the three deals that traded down were small offerings likely catering to a select group of IPO investors.
Excitement Over 3D Printing Lifts ExOne
ExOne, which manufactures 3D printing machines and printed products, raised $95 million in an upsized deal. The timing of the IPO was ideal, coming after a quarter in which printer sales doubled sequentially and at the end of year in which peers 3D Systems (DDD) and Stratasys (SSYS) both doubled in share price. In the largest first-day gain of the year to date, the stock rose 47% on Thursday, and it finished the week just above $30, up 67% from its offer price. While the company has yet to generate positive cash flow or meaningful profits, investors appeared willing to buy into a company that is targeting 40%-50% revenue growth in what is a potentially large market.
Boise Cascade Is Latest Successful Play on Housing Recovery
Boise Cascade, a North American wood products manufacturer and building materials distributor, raised $247 million. The Madison Dearborn-backed company became another example of investor confidence in the U.S. housing recovery, pricing above an upwardly revised range, rising 25% on its first day and finishing the week up 31%. Boise's strong offering followed the successful debut of rapidly growing homebuilder TRI Pointe Homes (TRI), which also priced above its expected range and has posted a 10% return.
Three IPOs Fall at the End of the Week
ZAIS Financial (ZFC), New Source Energy Partners (NSLP), Health Insurance Innovations (HIIQ) all began trading on Friday and each fell by at least 2%. ZAIS Financial, a mortgage REIT investing in whole loans and non-agency and agency RMBS, raised $120 million and was the worst performer. Despite being valued at a discount to book value, the stock declined 6%. Investors may have given little credit to its operating history since July 2011 (total return of 29%) because of its post-IPO transition to whole loan investments, which are not currently part of its portfolio. But mortgage REITs in general are not known for delivering first-day pops. In fact, each of the last six mortgage REIT IPOs traded lower on the day 1 (-5% on average); all but one are now trading above issue.
New Source Energy Partners is sponsored by oil and gas E&P New Source Energy, which failed in its attempt to go public in May 2012. The LP raised $80 million and fell 3% on Friday. While LPs were a bright spot in 2012's IPO market, the sector has begun to show some cracks so far in 2013. The two prior LP IPOs in 2013 traded flat or down in their market debuts.
Health Insurance Innovations priced a $65 million deal at the low end of the range and declined 2%. The company offers web-based short-term medical insurance plans through third-party carriers. Although membership in the cheaper plans could increase dramatically if employees are dropped from employer coverage due to the Affordable Care Act, the uninspiring debut suggests that many investors were hesitant to buy into its growth story.
First IPO Postponements of 2013
Two foreign companies, National Commercial Bank Jamaica (NCJ) and QGOG Constellation (QGOG), became the first companies to postpone offerings in 2013. National Commercial Bank Jamaica, already traded on the Jamaica Stock Exchange, was seeking $225 million. Although it was valued at a large discount to other Latin American banks, investors may have stayed away because of Jamaica's struggling economy, which is expected to continue to contract. QGOG Constellation, a Brazilian provider of offshore oil and gas drilling services, was set to be the largest deal of the week at $550 million. Its complete dependence on Petrobras (PBR) was negatively highlighted recently, when Petrobras' credit rating was put on negative watch. AutoGenomics (AGMX), which provides a molecular diagnostic system for genetic testing, delayed its $17 million deal and is now listed as day to day.
Mortgage REIT Is the Only Company to Set Terms
Orchid Island Capital, a mortgage REIT investing in Agency RMBS, was the only company to set terms last week. The lack of new deals is somewhat typical for mid-February, when companies are finalizing the prior year's financials. Orchid has operated since November 2010 and is managed by Bimini Capital, which is itself a publicly traded mortgage REIT. Bimini went public in 2004 and was delisted from the NYSE in 2007 during the housing crash (it now trades on the pink sheets). Orchid, whose portfolio ended 2012 with a fair value of $115 million, previously attempted to go public in July 2011 when it sought $83 million. The company refiled in October 2012 and is now looking to raise just $35 million. Its second IPO attempt could face push back after ZAIS Financial's negative debut.
Three Companies Added to the U.S. IPO Pipeline
Two more mortgage-related companies made initial filings last week. PennyMac Financial Services, an investment adviser that also produces and services mortgage loans, filed for a $288 million IPO. The company's advised funds, which include PennyMac Mortgage Investment Trust (PMT), a publicly traded REIT that listed in 2009, had net assets of $1.8 billion as of Sept. 30, 2012. The company was founded in 2008 by BlackRock and Highfields and is led by the former President of Countrywide Financial. Cerberus Mortgage Capital, a mortgage REIT investing in agency and non-agency RMBS, filed to raise $150 million. The company is newly formed and will be managed by Cerberus Capital Management, a private equity firm with $20 billion of AUM.
The third company added to the pipeline, EVERTEC, is a transaction processing service in Latin America and the Caribbean. It operated as a subsidiary of Popular (BPOP), the largest financial institution in the Caribbean, for more than 20 years until Apollo Global Management (APO) acquired a 51% stake in 2010 for $750 million. Sales for the 12 months ended Sept. 30, 2012, were $336 million, and EBITDA was $145 million.
U.S. IPO Market Performance Update
The large gains made by ExOne and Boise Cascade outweighed Friday's negative debuts and pushed up recent IPO returns. The average total return for the 24 U.S. IPOs from the past 90 days is 28%, and the average aftermarket return is 18%. In 2013, 17 IPOs have raised $5.3 billion (vs. $1.6 billion at this point last year), with an average total return of 17% and an average aftermarket return of 6%. The U.S. IPO pipeline now consists of 108 companies looking to raise $30.2 billion. The active pipeline (updated within the past 90 days) contains 37 companies seeking $9.5 billion.