Growth Strategies

Volatility Knocks the Wind Out of IPOs

A promising second half for new public listings may be derailed by the turbulent equity markets.
Alix Stuart and Vincent RyanAugust 10, 2011

Equity-market instability arising from global economic uncertainty could cause many companies to shelve their initial public offering plans and derail what could have been the most active year for IPOs since 2007, according to a PricewaterhouseCoopers Transaction Services report released Wednesday.

The tumult has already caused 6 of the 12 U.S. IPOs scheduled to price this week to be postponed. Cathay Industrial Biotech, Enduro Royalty Trust, TIM w.e., InvenSense, Home Street, and AgFeed all withdrew their pricings.

The CBOE Market Volatility Index (VIX) — also known as the “fear gauge” is a key indicator of investors’ appetite for IPOs. The index spiked on Tuesday and closed at 43 on Wednesday. It had been falling for a year and was close to 15, a range PwC calls favorable for pricing IPOs.

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The volatility affects the ability of companies to plan out six months and determine a good time to list shares, says Mark Heesen, president of the National Venture Capital Assn. And the downward trend of share prices could cause markets to readjust the valuations of companies in the IPO pipeline.

The 2011 U.S. IPO market was on a healthy pace, with 79 completed offerings raising $24.3 billion, up from 70 and $9.4 billion in the first half of last year, says PwC. More than 50 venture-backed companies are in registration, says Heesen, the biggest number in two and a half years. Moreover, “the companies that have registered in the past six months truly want to go public, [as] opposed to those that registered several years ago because they wanted to get bought,” he says. “The M&A market has been quite good, so [companies] haven’t had to go through the hoop of registering to go public to show they were viable.”

PwC says the only issuers that will be able to go to market are businesses that are “somewhat” immune to economic downturns, compared with those that are heavily dependent on the consumer or “general economic strength.”

With August a typically slow month for IPOs, it may take until September to determine how much the IPO market is affected by the battered confidence of investors, says PwC. “If the VIX declines during the remainder of August through to early September, IPO activity may recapture its prior buoyant levels of activity for the balance of 2011.”

A second important factor will be the 12-member, bipartisan congressional “supercommittee,” tasked with finding $1.2 trillion in U.S. budget savings by November, says the NVCA’s Heesen. “We have to see if the [committee] really does have the wherewithal to put out a serious debt-reduction proposal,” he says. “If the supercommittee can come together and act in a bipartisan way off the bat, you could see some stabilization in the market earlier than the end of the year. If [it] can’t. . . you could see many potential investors staying on the sidelines.”