The following is a small excerpt from our complete 2009 Global IPO Market Year-End Review and Analysis.
It is a testament to the resilience of global economies, entrepreneurship, and financial animal spirits that the global IPO market rebounded as quickly and strongly as it did in 2009 after the devastations of worldwide stock markets and banking systems in 2008. 2009 will be seen as a transition year between crisis and recovery to normalcy. While aggregate global proceeds are still well below normal levels, issuance accelerated through the year, creating a solid foundation for 2010.
U.S. IPO market accelerated
There were stark differences in the characteristics of IPOs originating from the dominant global players, the U.S. and China. U.S.-based IPOs were led by LBOs and mortgage REITs, reflecting private equity investors’ need to deleverage on one hand and financial opportunism on the other. In contrast, Chinese IPOs, whether debuting in the U.S., China or Hong Kong, raised money to pour into China’s domestic infrastructure, its nascent pharmaceutical industry, and other consumer-oriented enterprises. In a nutshell, the U.S. IPO market activity has largely been geared to healing the excesses of overleveraging in private equity and real estate, while the Chinese IPOs reflect a growth economy. That said, there are signs that traditional growth IPOs are returning in the U.S.. Though only one company went public during the first three months of the year, as the broader equity indices improved, IPO volume improved sequentially in each of the next three quarters, buoyed by private equity-backed deals, mortgage REITs and Chinese ADRs. For the year, there were 63 U.S. IPOs, up 47% from 2008 (and double 2008’s total excluding SPACs).
Returns were initially strong but faded as the year went on
IPO performance of 2009 was much improved versus 2008, although less strong than historical standards. The year’s pattern matched the trend seen in previous slowdowns that low issuance volume leads to strong IPO returns as only the highest-quality companies can go public and investors demand discounted initial valuations. Early in the year, performance was very strong as growing companies with attractive valuations were taken public. Later in the year, performance weakened as a result of a wave of private equity IPOs with more aggressive valuations and riskier companies taking advantage of the widening window of opportunity for IPOs.
To exemplify this dichotomy, IPOs in the first half of the year had an average 18% first-day pop and had gained 38% as of December 18; on the other hand, IPOs from the second half of the year rose 4% on their first day and moved up only 1% in the aftermarket.
Global IPO activity was dominated by China’s resurgence
The recovery of global IPO activity was most pronounced in Asia, particularly on the Hong Kong and Shanghai markets. Those two exchanges together raised $50 billion, which accounted for 49%of total global proceeds. Most of the activity was seen in the third quarter after the Chinese government ended a nine-month IPO freeze on the Shanghai exchange, leading to a slew of companies going public that had been waiting to raise capital for nearly a year or more. In global regions beyond the U.S. and Asia, the recovery was less pronounced or occurred later in the year. For example, European proceeds actually fell significantly from 2008, as 2009 did not see the energy IPOs generated by early 2008's record energy prices. However, the continent still produced $6 billion in fourth quarter IPO activity, compared with under $500 million for the first nine months, suggesting that Europe’s IPO markets have only recently begun to recover.
Performance was stronger than in the U.S., with Shanghai leading
Consistent with broader equity indices, global IPO performance was positive with the average IPO gaining 23% from offer price to December 18. The positive performance was largely driven by China, as Shanghai-listed deals traded up 51% on average and Hong Kong deals gained an average of 19%. By contrast, the rest of the world’s IPOs gained a respectable 12%. Outside of China, IPO markets saw some similar patterns to those discussed in the U.S. section of this report; IPOs later in the year were often pitched at aggressive multiples and larger IPOs, many backed by private equity or spinoffs, saw some trading resistance.
In 2009, IPOs came back slowly at first with activity accelerating through the year and deal flow dominated by mature companies, including a large number of private equity-backed firms. 2009 was largely a transition year; looking forward, several market developments are in place for 2010 to mark the return of the growth IPO. The pace of IPO filings has picked up, with 18 venture-backed companies filing for IPOs in the last four months of 2009, including a number of profitable, fast-growing technology names, a high-profile cleantech company, and interestingly a number of biotechs.
The VC supply is large, and mounting pressures for liquidity on one hand and a growing appetite among investors for growth on the other should widen the IPO funnel for this important segment of the new issues market. Private equity sponsors will also be committed to forging ahead with a steady flow of portfolio companies, particularly with debt maturities closing in and results looking better as recessionary periods are anniversaried. In addition to the VC and PE phenomena, investors should expect several large IPOs in the form of carve-outs or spinoffs of government assets, as well as a big demutualization. The Chicago Board Options Exchange finally looks poised to make its long-awaited public debut in 2010 after reaching an agreement with its members in late 2009. U.S. government-owned AIG (AIG) and GM (OTC:MTLQQ) are also targeting IPOs in 2010.
While 2009 was certainly not a rebound to normal IPO levels, the common theme we saw amongst the stronger deals is that investors are looking for opportunities to invest in growing companies. Our analysis of the U.S. IPO pipeline as well as the broader shadow backlog suggests that there is a significant supply of growth companies waiting to tap the markets, and the strong returns of 2009’s quality growth IPOs demonstrates that there is adequate demand to support it. Even if broader equity market returns are mediocre, 2010 could nevertheless mark the beginning of a strong IPO cycle.
For the complete version of our 2009 Global IPO Market Year-End Review and Analysis, please click here.
Disclosure: No positions