Resilient IPO Market Withstands Global Sell-Off: 2Q10 Global Review

by: Renaissance Capital IPO Research

Global market turbulence and rotten economic news put the IPO market to the test in the second quarter. Most investors would expect the global IPO market to have been impacted by the sell-off in global equity indexes. However, the IPO clearing mechanism continued to function, allowing underwriters to churn out new issues at a respectable pace. While issuers were often forced to make steep concessions on valuation, year-to-date global deal flow has already eclipsed full year 2009 totals and the average IPO managed to eke out a 2% return from the offer price. Against the glum global backdrop, the quarter ended on a high note as seven of the last 10 deals closed in positive territory, including a 40% gain from US electric vehicle manufacturer Tesla (NASDAQ:TSLA).

Make no mistake, the IPO market recovery is still unfolding, and the second quarter tells us that the road to a healthier new issues market will not be without its challenges. Postponements were up sharply in the US, and the debt crisis in Europe put more than 30 offerings on hold. Yet as we enter July, the outlook for IPOs looks anything but lackluster. With the pace of IPO filings accelerating during the 2Q10 and several mega deals on tap for the second half, 2010 could rank among the top years of the past decade in terms of proceeds raised. Given that IPO activity has hovered at unsustainably low levels over the last two-and-a-half years, the mounting backlog of IPO hopefuls gives us confidence that we are indeed on the verge of a very robust cycle for IPOs.

Key takeaways:
- With 203 first-half IPOs, global deal flow in 2010 has already eclipsed 2009 levels
- Asia maintains issuance lead; Europe rebounds with several large offerings
- US pipeline swells to 153 IPO hopefuls with high-profile filings from HCA (NYSE:HCA), Toys "R" Us (TOYS), Booz Allen (NYSE:BAH) and ZipCar (ZIP)
- Growth companies were the top US performers; liquidity improving for venture capital portfolios
- Potential record-breaking deals from China AgBank and GM are teed up for the second half

First-half global deal volume eclipses 2009 total
2Q10 deal volume increased slightly on a sequential basis to 103, and the 203 year-to-date deal count already exceeds the 178 deals from the full year 2009. Based on aggregate dollars raised, the 1H10 still trails the full year 2009 at $82 billion versus $106 billion, though 2Q10 proceeds of $37 billion represents a marked year-over-year improvement on the $10 billion raised during the 2Q09. Overall, global IPOs posted an average return of 2%, with only 47% closing the quarter above their offer price.

Asia maintains its issuance lead; Europe is a surprising second
Asia Pacific once again led all regions with USD $19.9 billion in aggregate proceeds raised, while Europe had an unlikely second-place showing at $10.2 billion despite the looming threat of a full-blown debt crisis and a cratering Euro. Perhaps even more surprisingly, several European deals posted strong double digit returns, including online travel platform Amadeus IT (18%), culture/enzyme producer Chr. Hansen Holding (13%) and Polish life insurer PZU (12%). The PRC (A-Shares) led all countries for the fourth consecutive quarter, with 50 deals raising an aggregate $11.2 billion in proceeds. However, Hong Kong proceeds of $1.2 billion (including China H-shares) posted a 47% decline from the 2Q09 and a steeper 70% drop from the 1Q10, which may signal weakening sentiment on China among global institutional investors.

US market gains steam despite pricing headwinds
US deal flow reached its post-financial crisis high water mark with 37 IPOs in the 2Q10, including three consecutive months of double-digit pricing activity, and the 64 deals year-to-date has leapfrogged the full-year total of 2009 (63). Total proceeds rose sharply to $4.9 billion, increasing nearly three-fold year-over-year and 12% on a sequential basis. The average deal size was largely flat at just over $130 million, as the US has yet to produce an offering larger than $600 million in 2010. The list of the 2Q largest deals included an independent petroleum E&P firm, two natural gas storage MLPs and turnaround story Express (NYSE:EXPR). The US largest US options exchange, CBOE Holdings (NASDAQ:CBOE), rounded out the top five with a highly-anticipated $340 million deal.

With 76 new companies entering the US pipeline in the 2Q10 (the most in more than two years), issuers are clearly becoming more optimistic about their IPO prospects. The 2Q10 IPO filings volume is up from 54 in the 1Q10 and brings the year-to-date tally to 130. The profile of these companies runs the gamut. The list includes billion dollar companies set to return to the public markets such as HCA (HCA) ($30B in sales), Toys "R" Us (TOYS) ($13B), and Nielsen (NASDAQ:NH) ($5B), as well as rapidly-growing venture capital-backed companies such as software vendor Tripwire (TPWR), car sharing service ZipCar (ZIP) and online game rental company GameFly (GFLY). It also counts nearly century-old franchises such as property and casualty insurer Liberty Mutual (LMA) and consulting firm Booz Allen (BAH). In aggregate, companies actively on file with the SEC represent north of $35 billion in potential new equity issuance, a figure that excludes an expected $10-$20 billion IPO from General Motors.

Though the global backlog is more difficult to quantify, there are numerous large private-equity and government-owned assets prepping for exits, and emerging markets are still chock full of growth enterprises in need of capital. Financial, energy, and infrastructure companies should continue to be among the key sectors driving issuance globally, while technology and financial enterprises currently account for nearly 50% of the active US pipeline. Even if the global economic recovery stalls, demand for unlevered growth and motivation for liquidity among sellers sets the stage for increased IPO activity in the latter half of 2010.