By Anthony Harrington
Encouraged by record highs in global stock markets, companies have been rushing to take advantage of investor enthusiasm while it lasts. The first few months of 2014 were particularly strong in Europe, the UK and the US.
The year began with a bang on the IPO front. A MarketWatch article back in February 2014 highlighted the fact that January saw IPOs in Europe, the Middle East and Africa hitting an all-time high. There were six European IPOs, raising a total of $3.1 billion in equity, making this the highest start to a year ever.
The bulk of the funds raised came from a single deal, the IPO of the Franco-Belgian cable group Altice, which IPO'd on the Amsterdam exchange at the end of January. The motivation for the January rush was the fact that companies who were planning IPOs anticipated a real surge of companies coming to the market through the summer of 2014, and wanted to get in ahead of the rush.
According to the Wall Street Journal, biotech companies have featured strongly in the 2014 "dash for cash," capitalizing on the mushrooming valuations currently being enjoyed by a number of biotech companies that have gone public since 2011. With six of the relative newcomers from the class of 2011-2013 already sporting $1 billion-plus valuations despite having not yet got their drugs all the way through the clinical trials process, investor appetite for biotechs is strong.
Intercept Pharmaceuticals (NASDAQ:ICPT), which IPO'd in October 2012, currently has a valuation of around $7.3 billion. According to the WSJ, it is just one rather outstanding example among many. By the middle of February, some 15 biotech companies had gone public in the US. The upsurge of investor enthusiasm for biotech has been echoed in other sectors, though perhaps to a slightly lesser extent, fueled by the onward march of global stock markets.
By early March, MarketWatch reckons that some 42 companies in the US had IPO'd, raising a total of $8.3 billion. This matches the figure for the first two months of 2007, which itself was the highest since 2000, when 77 companies went public at the height of the dotcom boom. The figure of 42 IPOs for the first two months of 2014 is more than double that recorded for 2013, which was itself considered a strong year for IPOs.
The rush of IPOs received something of a knock-back in the second quarter of 2014 through two major and unexpected geopolitical shocks. In Europe we had and still have the Russian annexation of Crimea and ongoing tensions between the new government of the Ukraine and Russia. In the Middle East at the time of writing, Baghdad itself was under threat from rebels who have taken over large swathes of the country in what amounts to a proxy war between Saudi Arabia, which is backing the rebels, and Iran, which is backing the Iranian government. This raises serious questions over the stability of the Middle East and the security of world oil supplies and has sent jitters through global markets that are still unresolved at the time of writing.
Nevertheless, according to a Money Morning Insider article in late June, the first half of 2014 has been the busiest for IPOs since the dot.com era of 1999-2001, with over 135 IPOs to date, a 65% improvement on the first half figures for 2013. The total sum raised by these 135 IPOs amounts to $29 billion.
The big question for the second half of 2014, however, is trying to figure out to what extent instability in the Middle East will impact investor appetite for further IPOs. The price of oil is already up around $112 per barrel, versus recent lows of $91. Typically the price of oil takes a while to top out at its historical "average" high of just over 9% during periods of instability in the region. If this happens, as a recent article points out, we can expect to see oil going over $120 by the end of the summer. But the key point is that periods of high oil price volatility unsettle the financial markets, and no one likes launching an IPO into an unsettled market, so the net effect of the near civil war in Iraq may well be to cause the current flood of IPOs to fall back sharply as we go deeper into the year.