Renaissance Capital 2012 US IPO Review (Updated)
After the fastest start since 2000, with the most anticipated deal in years on the horizon, the US IPO market entered May in prime condition . However, the European debt crisis intervened yet again, and a market decline turned into a month-long drought for IPOs following Facebook's botched offering. Deal activity returned sporadically in the second half, but uncertainty surrounding the fiscal cliff resulted in a disappointing end to the year, with the second-slowest November and December since the tech bubble. Still, the overall results showed an improvement over last year. With $43 billion raised, total proceeds were at the highest level since 2007, and the 21% average total return was above market indices. Consumer companies, such as organic food maker Annie's and discount youth retailer Five Below, and enterprise software providers, most notably Guidewire and Workday, produced some of the best-performing deals. After starting the year at a record high, the pipeline was cut in half largely due to the passage of the JOBS Act, which allowed smaller companies to file confidentially and created a large shadow backlog.
In an up-and-down year that started off strong but ended with the second-slowest November and December since the bubble, the US IPO market was modestly more active in 2012 , with 128 deals, up 2% from last year. Total proceeds were up 17% but fell 27% excluding Facebook. IPO activity consisted mainly of smaller deals, as the median deal size dropped 23%. Perhaps indicating a paradigm shift, despite three years of recovery, US IPO activity still has not returned to the historical norm of 150 to 200 annual deals, as the market continues to react strongly to external shocks. Excluding a handful of record IPOs - GM in 2010, three mega private equity-backed IPOs in 2011 and Facebook in 2012 - annual proceeds from US IPOs would have trended below $30 billion.
40% of IPOs priced below the range this year, up from 34% last year and near 2010's 42% record, as wary investors exerted pressure on pricing following pockets of slow activity . These pricing concessions resulted in a significant improvement in first-day performance. Only 19% of deals closed below their offer price on the first day compared to 33% in 2011. The average first-day return this year was 14%, the best since 2001, helping the average total return bounce back to 21% from a dismal -10% last year.
Overall issuance for private equity-backed IPOs increased 26% as 44 deals were completed. However, the average private equity-backed deal size shrunk 62% from $583 million in 2011 to $224 million in 2012. Just four deals managed to raise more than $500 million compared to 11 in 2012 and only one LBO, Realogy, raised more than $1 billion, compared to three in 2011 (Nielsen, Kinder Morgan and HCA). These three were the largest LBO IPOs in history, with an average deal size of $2.8 billion. Overall, the majority of private equity-backed IPOs in 2012 were characterized by late-stage investments in growth companies (e.g. Five Below, Annie's, Chuy's), as opposed to leveraged buy-outs of mature businesses as seen in previous years.
Facebook was the biggest VC-backed deal in IPO history and drove a 163% increase in VC proceeds year-over-year. However, excluding Facebook, VC-backed IPO activity was down 16% in terms of deal flow and 43% in terms of proceeds. Excluding Facebook, the average deal size was $104 million, down 32% from 2011. Internet IPOs were the biggest detractors for VC-backed IPOs as the number of deals fell 33% year-over-year and represented 26% of deal activity compared to 35% last year.
The JOBS Act went into effect on April 5, allowing smaller companies to file confidentially and thus reducing the visibility into IPO filing activity. Only 140 new filers entered the IPO pipeline in 2012 , down materially from 257 in 2011 and 253 in 2010. The current pipeline has 117 companies seeking to raise a total of $35.7 billion, down from 146 companies and $45 billion at the end of the third quarter. Of the 117 companies in the pipeline, 49 are considered to be active, having filed an amended document within the past 90 days. The shadow pipeline of companies that have filed confidentially with the SEC could range anywhere from 60 to 100 companies. Among the recent actual IPO filers, notable companies include the American unit of retirement, investment and insurance company ING, Bright Horizons Family Solutions, which offers work site child care and early education centers, and Zoetis, Pfizer's animal health unit, which is expected to launch in early 2013 and could raise as much as $4 billion.
Now three years into the recovery, the IPO market remains well below the levels seen in the last cycle. The average deal count of 136 in the last three years is well below the 205 average of 2004 to 2007. Over the last decade, the IPO market has become increasingly captive to the underlying stability and trends of the overall equity markets. When major exogenous events, such as the European debt crisis and the fiscal cliff, roil the securities markets, IPO activity slows or shuts down altogether (e.g. August-October 2011 and May-June 2012). US IPO activity has also been below the levels we would expect in a normal economic rebound because of the tepid nature of the current recovery (unusually slow GDP growth and ongoing high unemployment) despite unprecedentedly expansionary monetary policy. The JOBS Act, which was touted as a way of opening the IPO market to small growth companies, has had no noticeable effects other than reducing the minimum time from filing to pricing. Without more structural changes, we are less optimistic that the JOBS Act in and of itself will solve some of the issues facing the US IPO market. The good news is that the IPO backlog, including the large shadow backlog, continues to grow, and IPOs by smaller companies actually rose in 2012. To see a good year in 2013, the IPO market will need not only a constructive resolution to the fiscal cliff, but also a steadier recovery in the broader equity markets.