Capital Markets

Bankers See IPO Growth Ahead

A survey of investment bankers by BDO USA predicts an 11% increase in the number of U.S. IPOs in 2011.
Vincent RyanJanuary 3, 2011

Initial public offerings in the United States will grow in number and size in 2011, but the increase will be measured, according to a survey of investment bankers by BDO USA. Private-equity-backed companies will be the biggest source of IPOs on U.S. exchanges this year, say bankers, with spin-offs and divestitures next on the list. And for investors, average returns will be essentially flat compared with 2010.

Taken as a whole, the results reflect growing confidence in the capital markets, says BDO. Overall, bankers predict the number of IPOs will rise 11%, and the average offering size will climb to $268 million. That will push total U.S. IPO proceeds to $45 billion in 2011, says BDO.

While U.S. IPOs rebounded in 2010, with 154 deals that raised $38.7 billion, IPO research firm Renaissance Capital characterizes the market’s recovery as “subdued.” Subtracting General Motors’s mammoth fourth-quarter offering of $16 billion, the proceeds from U.S. IPOs would have been only 5% higher than in 2009. That makes the projected forecast for 2011 appear even stronger.

Last year, deal sizes shrank to an average of $251 million ($150 million minus the GM IPO) due to smaller companies coming to market and “valuation pushbacks on larger ones,” says a year-end report by Renaissance Capital. About 70% of PE-backed deals priced below the expected midpoints, for example, many with a discount of 20% or more, says the research firm. And even then, first-day performance was poor. On average, PE issues “popped” just 2%. “Unless issues offered a compelling case for topline growth and a manageable balance sheet, big valuation haircuts were necessary to get investors to bite,” says Renaissance Capital.

With financial sponsors looking to exit the large leveraged buyouts of 2005-2007 and deliver returns to their clients, IPO activity from PE firms will be a big driver of IPO growth this year, say bankers. Large PE-backed IPOs already in the pipeline include HCA, Toys R Us, and Nielsen Holdings. Whether the valuation haircuts will be as large this year is unclear, but as in 2010, investors are likely to prize issues that are competitively priced and have stable businesses with strong cash flows and lower debt levels than in the past.

The biggest threats to the IPO market in 2011 are constrained bank lending, market volatility, and high unemployment, in that order, according to BDO’s banker survey. Few cited weak consumer spending as a concern.

From a global market-share perspective, U.S. exchanges will be looking to rebound from a poor showing last year. IPO issuance from China, Hong Kong, India, and Japan accounted for almost two-thirds of all global capital, while North America’s share of the IPO market fell from 21% in 2009 to 16%, says Renaissance Capital. In addition, a record number of Chinese companies raised capital in the United States last year. They accounted for 27% of deal volume, up from 18% in 2009.