US Market Review and Outlook
The US IPO market produced 110 IPOs in 2011—a 23% decline from the 142 IPOs in 2010. Through the first seven months of 2011, the number of offerings was well above the number in the comparable period of the prior year, but then the IPO market stalled due to European economic concerns. After producing a mere four IPOs from August to October, the market rebounded nicely to end the year with strong momentum, which has carried over into 2012.
Gross proceeds dropped 14%, to $31.1 billion in 2011 from $36.3 billion in 2010. The percentage decline in gross proceeds was less significant than the reduction in deal flow, due to the presence of six billion-dollar offerings in 2011. The sole offering of this magnitude in 2010 was the $20.1 billion offering by General Motors—the largest IPO in US history—without which gross proceeds in 2010 would have lagged behind the 2011 total by a wide margin.
The largest IPO of 2011 came from hospital operator HCA Holdings ($3.79 billion). Yandex, Russia's leading online search engine, produced the year's largest tech IPO ($1.435 billion).
Median IPO size increased almost 50%, from $100.0 million in 2010 to $147.8 million in 2011. The 2011 figure represented a resumption of the upward trend in median deal size since 2004.
In 2011, there were two "moonshots" (IPOs that double in price on their opening day)—Chinese Internet company Qihoo 360 Technology soared 134% in first-day trading, and online professional network company LinkedIn jumped 109%. Qihoo surrendered most of this gain in the aftermarket, ending the year up only 8%, while LinkedIn also retrenched, to end 2011 up 40%.
The average first-day gain for all IPOs in 2011 was 12%, and 27% of the year's offerings were "broken" IPOs (IPOs whose stock closes below the offering price on their opening day). These results compare favorably to 2010, when the average firstday gain for all IPOs was 10%, and 32% of the year's offerings were broken IPOs.
Aftermarket performance, however, was much poorer in 2011 than in 2010, as capital markets were buffeted in the third quarter of the year. The average 2011 IPO lost 11% from its offering price by the end of the year, with only 46% of the year's IPOs trading at or above their offering price at year-end. By contrast, the average 2010 IPO appreciated 28% by the end of the year, and 68% of the year's IPOs were trading at or above their offering price at year-end. Performance metrics from first-day close to year-end painted an even starker picture, with the average IPO of 2011 declining 20% on this measure.
IPO companies were less profitable in 2011 than in recent years. The percentage of profitable companies going public dropped from 59% in 2010 to 55% in 2011—the lowest percentage since the tail of the dot-com boom in 2001.
The median annual revenue of IPO companies increased slightly, from $100.8 million in 2010 to $105.2 million in 2011. These results illustrate the continuing bifurcation of the IPO market, which seeks larger and more profitable companies, while also embracing emerging technology companies with strong growth and a demonstrated path toward profitability.
Individual components of the IPO market fared as follows in 2011:
With 42 offerings, venture capital–backed IPOs represented 38% of the market in 2011, compared to 43 deals and a 30% market share in 2010. Most of these venture capital–backed IPOs were by technology or life sciences companies. The average 2011 VC–backed IPO lost 6% from its offering price through year-end. Private equity–backed IPOs grabbed 26% of the market in 2011, with 29 offerings, compared to 39 offerings for a 27% market share in 2010. The three largest IPOs of 2011 were the largest private equity–backed offerings in US history: HCA Holdings ($3.79 billion), Kinder Morgan ($2.86 billion) and Nielsen Holdings ($1.64 billion). Deal flow in the technology sector remained strong in 2011. Tech-related companies produced 54% of the year's IPOs, up slightly from 53% in 2010. Tech IPOs, however, fared worse in the aftermarket than IPOs in other sectors, with an average loss through year-end of 16%—pulled down by a number of very poorly performing Chinese tech IPOs—compared to the average loss of 5% for non-tech IPOs. Foreign issuers accounted for 25% of the market in 2011, down from 39% in 2010 and the lowest level since 2006. China, which produced a lofty 40 IPOs in 2010, sent only 13 IPOs to the US in 2011. In 2011, companies based in the western United States (west of the Mississippi River) completed 55 IPOs—a figure buoyed by 15 IPOs from Texas and five from Oklahoma, 80% of which were energy-related. Eastern US–based issuers accounted for 28 IPOs, and foreign issuers accounted for the remaining 27 IPOs.
Although we remain fundamentally optimistic about the long-term prospects for the IPO market, economic uncertainty lies close to the surface. IPO market activity in the coming year will depend on a number of factors, including the following:
Economic Conditions: Economic growth is a key determinant of strength in the capital markets. After a recession that was longer and more severe than almost anyone anticipated, the economy began to recover by mid- 2009. Since then, economic recovery has been accompanied by mixed signals, and the timing and extent of economic growth remains uncertain. Capital Market Conditions: Stable and robust capital markets are a leading indicator of IPO activity. After two strong years, which saw the Nasdaq surge 44% in 2009 and tack on another 17% in 2010 and the Dow increase 19% in 2009 and 11% in 2010, both indices gyrated in 2011. Recovering from a 15% sell-off in late July and early August, the Dow ended 2011 with a 6% gain for the year. The Nasdaq suffered a steeper mid-summer fall and was not able to recover as quickly as the Dow, ending the year with a 2% loss. In the first quarter of 2012, the Nasdaq jumped 19% and the Dow increased 8%. Geopolitical Factors: Several geopolitical factors could adversely affect the IPO market. Debt default by troubled Euromember nations—although staved off, to date, by bailouts and austerity measures—could reverberate globally; the specter of higher oil prices could weigh heavily on the world economy; and there is growing nervousness that the Chinese economy is a bubble waiting to burst. Regulatory Environment: The corporate governance reforms resulting from the adoption of the Sarbanes-Oxley Act in 2002 and the Dodd-Frank Act in 2010 have helped improve accountability to stockholders, board oversight of management, board member qualifications and investor confidence, but have also increased the compliance cost and potential liability of being public. The new and enhanced governance requirements do not pose a major impediment to going public for most companies, and many of these requirements—such as robust controls—are needed in a growing enterprise, whether or not it ever pursues an IPO. For those IPO candidates that have been deterred from going public by the more rigorous corporate governance environment, however, the new JOBS Act should offer some relief. Impact of JOBS Act: Enacted in early April 2012, the JOBS Act is intended to improve access to the public capital markets for startup companies. The JOBS Act provides "emerging growth companies" (EGCs) up to five years following their IPO to come into full compliance with certain disclosure and accounting requirements. An EGC is any company that had annual revenues of less than $1 billion (indexed for inflation) during its most recently completed fiscal year, other than a company that completed its IPO on or before December 8, 2011. Approximately 90% of all IPO companies over the past five years would have qualified as EGCs. The extent to which the JOBS Act prompts EGCs that otherwise would have stayed private to go public remains to be seen. Venture Capital Pipeline: Venture capitalists depend on IPOs—along with company sales—to provide liquidity to their investors. Encouraged by the receptivity of the IPO market to venture capital–backed companies, the number of VC-backed companies entering IPO registration, or resuscitating dormant filings, continues to increase. Longer term, the pool of IPO candidates will be affected by trends in venture capital investing, including the timeline from initial funding to IPO. According to Dow Jones VentureOne, the median time from initial equity financing to IPO fell to 6.5 years in 2011 from 8.1 years in 2010, reflecting an influx of younger and smaller VC-backed companies into the IPO market in 2011. Private Equity Impact: Private equity investors also seek to divest portfolio companies or achieve liquidity through IPOs. PE-backed companies are usually larger and more seasoned than VC-backed...