Baird's outlook for IPO activity in 2011

Looking Through a Window of Opportunity

As of December, revenues from initial public offerings in 2010 were on track to reach a record $300 billion. The previous record of $295 billion was set in December of 2007, which – to keep things in perspective – was a little more than two months after the Dow hit its all-time high.

The global economic crisis caused the IPO market to stop and take a deep breath in 2008. After holding that breath through 2009, IPOs made a strong comeback in 2010. By mid-year, the 57 IPOs priced represented a more than 500% increase over the first six months of 2009. And the resurgence of the market in October and November accelerated things further. It is worth noting, however, that the average return for IPOs during this period was more than 3% off their offer prices. While on the surface that figure might seem discouraging for the IPO market, there were some outstanding IPO success stories in 2010. And there are still many companies waiting in the wings to go public. For them and for investors, 2011 will prove a critical year.

Shaping up for a showing
Many companies spent the bulk of the downturn shoring up bottom lines and paying down debt, but the second half of 2009 saw a good number shift their focus to growth. Throughout 2010, C-suite executives were extremely focused on demonstrating strong, consistent growth as they prepared for a new IPO window to open. Many of these companies are expected to try and leverage their solid recent performance with investors in 2011.

Based on timelines in place, spring and summer should be very active for IPOs, market conditions permitting.

The price of demand
It would be easy to assume lower valuations of early 2010 IPOs were a reflection of diminished demand, but the evolution of the trend and a closer look at the underlying dynamics suggest otherwise. During the downturn, a lack of available credit and general economic uncertainty were logical explanations for diminished IPO interest. Since then, general belt tightening and the return of available credit have yielded more cash to invest in 2011. And the upward trend in the equity market during the fourth quarter seems to indicate a returning appetite for risk. But credit availability still isn’t what it was in 2007, and the recent unpleasantness has left many investors more cautious – or at least more disciplined and valuation-driven.

For IPOs, valuations appeared to have stabilized by the end of 2010. However, in many cases, they had not returned to previous levels. Assuming valuations in the broader equity market remain high, investors might look harder for bargains among 2011 IPOs – something companies will have to consider when pricing.

What to keep in mind for 2011
Take a wider world view. The strong global IPO market this year was due in large part to rapid growth in Asia, especially in the financial and insurance sectors. Asian IPOs represented 64% of total IPO revenues this year, with China alone making up more than 45%. In 1999, Asia accounted for only 12% of global IPO revenues. Even Europe, amid widespread debt concerns and volatility, managed to grow its IPO market by more than 500% in 2010. And the upward momentum is expected to continue.

Also, keep a close eye on Small-Cap IPOs. Significant activity in this segment would mean the IPO recovery has cleared a major hurdle in 2011.

A healthy IPO market rarely exists in anything but healthy, stable economic environment. However, once we’re in a healthy IPO market, it can contribute significantly to the further expansion of the economy as well as have a positive impact on employment as proceeds are put to work.