The 222 companies that went public in 2013 eclipsed the 217 IPOs that priced in 2004, and was the most since 2000. For a more recent comparison, there were 128 IPOs priced in 2012, and 125 in 2011. We have at long last broken the post-2000 bubble period IPO record-though an uninspiring hurdle, to be sure.
Of course, the comparisons to the pre-bubble period of the 1990s are a bit daunting. In 2000, there were 406 IPOs. And-get this-84 of these IPOs doubled on the first day of trading. To put the number of 84 in context, there were only 94 IPOs in 2008 and 2009-combined. More on this subject of first day doubles later.
But back to the present. 2013 was a blockbuster year for IPOs.
But before we get to the rest of the market, let's give Twitter (TWTR) its due and then move on, because 2013 was about a lot more than Twitter.
On November 6th, Twitter raised $1.8 billion in its IPO at $26 per share, well above its initial $17-20, and then upwardly revised to $23-25, price range. The stock closed up 73% on its first day of trading and 133% as of year-end. It was the fourth largest IPO of 2013 (Plains GP Holdings' (PAGP) $2.8 billion IPO was the largest).
Here are some of the highlights of the 2013 IPO market.
- Peak week. The 13 IPO pricings in the week of November 4th were the most in a week since November 2007.
- Peak month. October was the busiest month for IPOs since 2007, with 30 companies raising nearly $12 billion. November was the third consecutive month with at least 20 IPOs-the longest such streak since 2006.
- Peak filings. There were 258 new IPO filings in 2013, an increase of 84% from the 140 new filings in 2012.
- Peak number of IPOs. As mentioned earlier, the 222 IPOs in 2013 was a post-bubble high and an increase of 73% from the 128 IPOs in 2012.
- Peak gross proceeds. The $54.9 billion in gross proceeds raised in 2013 was the most since the $48.7 billion in 2007, and an increase of 29% from 2012.
- Peak sector. There were 54 healthcare IPOs in 2013, the most in any industry. The tie for the silver medal went to financial services and technology with 45 IPOs each. Of particular note within healthcare was the 37 biotech IPOs that raised over $2.7 billion in gross proceeds. These numbers eclipse the 26 biotech IPOs and $1.9 billion in gross proceeds raised in 2000-at the height of the tech bubble. Moreover, the total gross proceeds raised by biotech companies in IPOs in 2013 exceeded the amount raised in IPOs for the biotech sector in the previous five years combined.
- Peak performance. The average IPO produced an average return of 40% (as measured from offer price to December 31st). There were 29 companies with total returns in excess of 100%. Insys Therapeutics (INSY) was the top of the class of 2013 with a gain of-drum roll, please-406%.
- Peak first day pops. The average first day IPO "pop" was 17%-the highest in at least 10 years.
- Peak first day doubles. The stocks of six companies doubled on their first day of trading. To put this type of performance in perspective, from 2001 to 2012 there were only eight companies that doubled on the first day. This represents a mere 0.5% of all IPOs priced during that 12-year span.
So should we be worried that, as a November 10th headline in the Wall Street Journal article suggested, the "New-Issue Flurry Hints at Trouble for Markets"? The short answer: no. Why? Two reasons.
First, the IPO market is now only recovering from a lousy 10-year stretch where we averaged a pitiful 139 IPOs per year-a fraction of the 440 or so IPOs annually during the decade of the 1990s. For context, the number of exchange-listed stocks declined from over 8,500 in 1997 to just a little over 5,000 at the end of 2012-a drop of about 40%, or 230 companies per year.
Second, equity valuations are above historic averages, but not alarmingly so. Based on estimated S&P 500 earnings of $110 for 2013, and a year-end index price of 1,848, the earnings yield is 6.0%. This compares to a year-end 10-year Treasury yield of 3.0%. So one could very plausibly argue that on this relative basis, and with interest rates with nowhere to go but up, stocks actually look cheap.
So now let's try to bring our analysis full circle.
Large public companies are struggling to grow their top lines. In a slow growth economy with full stock market valuations and no competition from fixed income, public investors are-and almost assuredly always will be-willing to pay a premium for the 20-30%+ expected revenue growth that is typical of many venture capital-backed technology companies that have recently gone public.
Last year's hot IPO market was not a bubble. Rather, it is a welcome recovery of the vital new issue machine that drives the economy and creates jobs, but which has been in the doldrums for most of the last dozen years. Barring the normal shocks that happen to the stock market from time to time and which are perfectly normal, expect the IPO market to remain strong for 2014 and the foreseeable future.
Additional disclosure: The opinions and observations expressed herein are solely those of Timothy J. Keating and are intended to provide insights on the IPO market at large and at the current time. None of these opinions and observations should be construed as relating to any specific portfolio company held by Keating Capital (including the future IPO timing or plans of any such portfolio companies). This article is not intended to be a solicitation to purchase or sell any security (including Keating Capital). Neither Timothy J. Keating, Keating Capital nor Keating Investments, currently own, or have plans to purchase, the shares of any company referenced herein.