An optimistic US can expect a heady start to the IPO season
2014-09-03 11:25:36
IPO spring. Source: TheAustralian
A BUSY initial public offering market is warming up.
Chinese e-commerce giant Alibaba Group Holding plans this month to begin a marketing roadshow for what could be the largest IPO ever, potentially raising more than $US20 billion ($21.5bn).
New York office landlord Paramount Group filed preliminary paperwork last week for what may be the largest-ever debut by a real-estate investment trust. Online-storage start-up Box and consumer-credit upstart LendingClub also are expected to price offerings in coming months.
The anticipated flood would cap off the busiest period for new US share listings in decades. Companies this year have raised $US46.4bn, the most in the first eight months of any year since 2000, according to data provider Dealogic.
“We still have a tonne in the hopper and I think people are optimistic about being able to execute deals after Labour Day,” said Marc Jaffe, co-chairman of the global capital-markets practice at law firm Latham & Watkins.
US stocks’ climb to record highs is affording companies an opportunity to sell shares at attractive valuations. Money managers say many IPOs look like good bets. Some feature rapid expansion in profit or sales and offer new ways to bet on trends such as the emergence of cloud-based business software or increased US energy production thanks to the shale-drilling boom.
“If you have a good growth opportunity, investors are there,” said Scott McNeill, chief financial officer of Dallas-based oil driller RSP Permian.
The company and its early investors sold a combined $US744 million worth of stock in a January IPO and a “follow-on” stock offering last month. RSP Permian is looking to finance West Texas oil wells without taking on too much debt.
IPOs further benefit from a perception among many investors that other assets, including bonds of all types, are fully valued following sharp rallies.
“With interest rates low and with good corporate-earnings growth and nowhere else to invest, risk appetite is alive and well,” said Matt Litfin, who helps oversee $US4.6bn as a portfolio manager at William Blair Funds.
To be sure, these deals carry their share of risk. Companies often go public at an early stage, when their sales and profit outlooks are particularly unclear.
This year, IPOs are attracting a higher price tag relative to their sales than in the past. Companies have fetched a median IPO price 8.2 times their latest year’s sales, versus a median price-to-sales ratio of 3.6 in the previous 12 years, according to data compiled by University of Florida professor Jay Ritter, who researches IPOs.
That is in part because this year has featured a disproportionate share of IPOs by biotechnology companies, which often go public without meaningful revenue. Excluding biotech firms, this year’s IPOs have fetched a median price-to-sales ratio of 4.2 times.
Some market watchers say the IPO boom has thinned the ranks of attractive companies, particularly in hot sectors such as tech-nology.
“Maybe a year and a half ago, I had eight to 10 (prospective IPOs) that I was heavily anticipating. Now I only have three or four,” said Tony Ursillo, technology equity analyst and portfolio manager at fund firm Loomis, Sayles & Co, which oversees $US221bn.
Since IPO activity accelerated last year, some one-time darlings have fallen from grace.
Advertising-technology provider Rocket Fuel’s stock rallied as much as 148 per cent in the months after its September 2013 IPO, but last week its shares closed 44 per cent below their IPO offer price.
Market participants said the rally in these so-called momentum stocks was driven by short-term-oriented bets that their share-price gains alone would attract further buying. Many of these stocks sold off sharply in March and April.
Fund managers stress that companies going public now generally are more solid than in the late 1990s and early 2000, when a host of dotcom companies, with little more than a marketing plan and a catchy name, went public.
“One thing we’ve seen this year is a good diversity across the business, and we’d expect that to continue,” said Jeffrey Bunzel, head of equity capital markets for the Americas at Deutsche Bank.
The health care sector, which has accounted for the largest share of IPO activity of any industry in the past year, also represents the biggest share of the public backlog, according to Dealogic.
Also on the horizon is a slate of big energy deals, driven by surging production on US soil.