Global IPO Market Continues to Gain Momentum: 3Q10 Global Review

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 |  Includes: ACN, CCSC, CIS, MCPIQ, MMYT, NXPI, QLIK, RP, SMT
by: Renaissance Capital IPO Research

Global IPO issuance continued at stable levels in the third quarter, with China-based companies debuting in Hong Kong, Shanghai and the US at a greater rate than US-based issuers. In terms of performance, fast-growing consumer and technology-related IPOs from both China and the US dominated the charts, while larger and more mature private-equity backed companies in the US generally performed poorly despite pricing haircuts demanded and received by investors. This price-conscious discipline augers well for upcoming IPO issuance, which we believe will continue at levels above those seen in the third quarter.

Key takeaways:
- Global proceeds raised increase 29% year-over-year to $44 billion with Asia Pacific maintaining the lead
- US deal flow continues to gain steam; 33 companies raise $5.3 billion
- Dramatic improvement in US performance driven by fast-growing tech companies and Asian ADRs
- US IPO market positioned for very active 4Q10 with more than 170 companies in the pipeline

Global 3Q10 proceeds increase 29% with the help of China's AgBank IPO

There were 90 global IPOs completed during the traditionally slow third quarter this year, a marked improvement from the year-ago period, during which only 51 companies came to market. The dollar amount of aggregate proceeds raised increased 29% year-over-year to $44 billion mainly due to Agricultural Bank of China's record-breaking $19 billion IPO in July. Excluding this deal, the amount of proceeds raised would have fallen 28%. The $44 billion raised in the 3Q10 brings the total amount of year-to-date proceeds to $126 billion, eclipsing the $106 billion raised during the full year 2009.

Asia Pacific maintains the lead in volume; North America boasts strong returns

The Asia Pacific region continued to dominate the global IPO landscape with a total of 67 deals and $36 billion in capital raised, while Europe fell back, generating only $2.0 billion with investor sentiment still weak following the debt crisis. Overall, global performance dramatically improved, with the average IPO posting a quarterly return of 23% compared with only 2% in the 2Q10. On average, Asia Pacific's 67 deals climbed 24%, in comparison with Europe's three deals, which traded down 9%. Despite making our list of the quarter's ten largest deals, London's highly anticipated Ocado IPO dropped 27% by the end of the quarter as investors expressed skepticism over the online grocer's short track record. North America led in terms of performance with an average quarterly return of 27%, though many of the region's best performers were China-based ADRs supported by growth-hungry US investors.

Deal flow remains stable in the US market

US deal flow in the 3Q10 tracked relatively in line with that of the three preceding quarters with 33 companies going public and raising an aggregate of $5.3 billion. Though the amount of proceeds raised was down 18% year-over-year, it was up 8% on a sequential basis. Private equity firms were active participants in the US IPO market, accounting for $2.4 billion (45%) in proceeds and sponsoring companies such as SMART Technologies (NASDAQ:SMT) ($660 million) and NXP Semiconductors (NASDAQ:NXPI) ($476 million), the largest and second largest IPOs of the quarter. The best performing PE-backed IPO in the 3Q10 was Resource Capital's Molycorp (MCP) ($394 million), an early-stage producer of rare earth oxides whose stock fell 8% in its debut but ended the quarter up 102% from its IPO price.

Technology-related growth stories and Chinese ADRs drive US performance

Performance improved dramatically on a sequential basis with an average total return of 27% (excluding the three IPOs that priced on the last day of the quarter and began trading October 1). Investors remained price-conscious as evidenced by the postponement of property and casualty insurer Liberty Mutual Agency Corporation's $1.2 billion IPO, which was shelved due to pricing sensitivity and would have been the year's largest US IPO. That said, companies with attractive growth stories had little trouble generating investor interest, causing performance to improve considerably from the 2Q10, during which the average IPO fell 8.5% from its offer price.

Five of the top ten performers in the 3Q10 were US-listed ADRs, with India-based online travel company MakeMyTrip (NASDAQ:MMYT) topping the list. Its stock soared 89% on its first day of trading, making it the best IPO debut since September 2007, and gained an additional 47% in the aftermarket with investors drawn to its large addressable market and scalable model. Other notable ADRs include China-based Country Style Cooking Restaurant Chain (NYSE:CCSC), a fast food chain that has expanded aggressively from nine locations to over 100 in less than three years, and Camelot Information Systems (NYSE:CIS), a Chinese provider of outsourced IT services boasting long-standing partnerships with IT giants IBM (NYSE:IBM) and Accenture (NYSE:ACN). Fast-growing US software firms were also well-received by investors with business intelligence company Qlik Technologies (NASDAQ:QLIK), on demand property management software provider RealPage (NASDAQ:RP) and online document manager IntraLinks Holdings posting an average gain of 75% from their listing price.

Outlook

Though the global IPO market has yet to fully recover, the healthy level of deal volume and dramatic improvement in performance seen in the 3Q10 indicate IPO investors are more than willing to participate given an attractive fundamental story pitched at a reasonable price. With the global backlog exceeding $120 billion in proposed proceeds and including high-profile deals such as General Motors and AIA Insurance, the IPO market is primed to see very robust activity during the final three months of the year.