Ernst & Young is forecasting a surprising 20-percent rise in U.S. initial public offerings this year, as lower interest rates and corporate recapitalizations help offset a weak economy and energize the stock market in general.
“U.S. IPO markets remain resilient in the face of subprime turmoil,” the auditing firm asserts in a new comprehensive report titled “Growth during Economic Uncertainty: Global IPO Trends Report 2008.”
The report points out that although subprime jitters slowed the new issue market after the U.S. liquidity crunch started in the second quarter of 2007, the third-quarter interest rate cut put the domestic IPO market back on track toward record issuance levels in the fourth quarter. Although the U.S. economy continues to slow, it says, the Federal Reserve is expected to continue easing interest rates, with recaps at financial institutions maintaining their pace from the first quarter.
Earlier this year, PricewaterhouseCoopers took a darker look at the IPO market, and the damage done to it by the credit crisis, although it too saw signs of strength developing.
While 2007 IPO results were weak, E&Y did record some significant positives to go with the recapitalization trend. It notes EMC’s carve-out of VMware, and MAN Group’s carve-out of MF Global. “All of these factors will continue to be a driving force for the IPO market in 2008,” it adds.
A second driver of continued strength has been the monetization of the leveraged buyouts since 2004. E&Y predicts IPOs of recent LBOs will continue and may accelerate, especially if the leveraged credit markets don’t improve.
After all, private equity firms get their biggest returns in three ways — by taking their portfolio companies public, selling them, or recapitalizing.
E&Y notes, however, that despite the recent uptrend, the U.S. IPO market is losing global market share. From 2004 through 2007, it says, the volume of IPOs worldwide more than doubled, from $130 billion to about $280 billion. And the U.S. has been a minor participant in that growth. Most of the growth has come out of Europe, Middle East, and Africa (EMEA), largely Eastern Europe, and the Middle East, and to a significant degree Asia.
“These markets are going to continue to be strong, while some of the developed markets are going to remain challenging,” E&Y says. Specifically, global IPO fund-raising last year hit an all-time high of $287 billion, raised in 1,979 deals.
Greater China raised the most capital and launched the most IPOs, drawing in $66 billion in 259 deals. The US generated $34.2 billion in 172 issuances, while Brazil’s IPO markets produced $27.3 billion in 64 IPOs.
However, Brazil, Russia, India and China &#$8212; the so-called BRIC countries &#$8212; raised $119 billion, over 40 percent of total global IPO proceeds. By contrast, a decade earlier the U.S. and Europe dominated IPO markets, and all the BRIC group together produced just 5 percent of total IPO proceeds.
“Today, capital follows a good investment story, wherever it’s listed,” says E&Y. “Global liquidity and thriving local economies have ignited rapid growth in the emerging markets. It’s also getting easier to value and finance ideas outside the public markets, thanks to an expanding array of capital sources, including private equity, venture capital, hedge funds, private placements and sovereign wealth funds.”
Even so, in the first quarter of 2008, almost all global IPO markets lost their momentum as 236 IPOs generated $40.9 billion, representing a 38 percent drop in volume and a 15 percent decline in capital raised from the first quarter of 2007.
The largest IPOs by value was the $19.6 billion offering of Visa Inc. in the largest US IPO ever.
Keep in mind that 8 out of the top 10 IPOs represented companies from the emerging markets. “Thus, bolstered by robust economic growth, many emerging markets continue to prosper and produce IPOs while developed markets endure a slowdown,” E&Y notes.