How many more initial public offerings can the equity markets swallow without bursting? “A lot,” seems to be the estimation of investment bankers and issuers that are planning coming-out parties for the fourth quarter.
An already large IPO pipeline expanded in the third quarter, with 85 companies submitting initial filings to the Securities and Exchange Commission, according to Renaissance Capital. That was the most in a third quarter since 2007. The queue to list on U.S. exchanges stood at 142 companies (with $31 billion in stock to sell) on October 2.
This comes on the heels of the record-breaking, $22 billion IPO of Chinese e-commerce leviathan Alibaba. Alibaba had “a conservative valuation and compelling story,” says Renaissance Capital, which led to a 38% price “pop” on the first trading day.
But the real story behind Alibaba’s transaction is that there may still be some sanity about new issues. Even Alibaba couldn’t sustain its day-one bang, falling from a high of about $99 per share to near $86 last week.
In addition, although IPOs raised $37 billion in the third quarter, 55% of them priced below the initial range, Renaissance’s numbers show.
“Investors balked at the valuation of many biotechs and financial companies,” says Renaissance. “Unlike the second quarter, the worst-performing IPOs were not hobbled by a major market correction, and their poor performance relates more to company-specific issues,” Renaissance says. That suggests some ability for this market to discriminate.
Finally, in the aftermarket, the average total return for all IPOs in the third quarter was 21%, not heady by any means. In the fourth quarter of 2013, comparatively, shares of newly trading companies skyrocketed by 46%.
However, the fourth quarter may prove challenging digestively: five or more billion-dollar deals may price, and equity indices wilted in the first few days of October. Still, as Renaissance points out, so far “the 2014 IPO market has proven resilient to minor shocks.”