The windows for completing a deal successfully are likely to open and close quickly, and often with little or no warning.
1. Learning to live with volatility
The biggest single factor affecting the global IPO markets last year was probably volatility. The CBOE Volatility (VIX) index, a popular measure of implied volatility of S&P 500 index options, has become one of the closest–watched market indicators.
When the VIX is above the 20% to 25% range, volatility is such that the IPO markets are effectively shut. The VIX was on a downward trend in the first half of 2011, but it shot up in the middle of the year when the European debt crisis unfolded and the US saw its credit rating downgraded.
Volatility will most likely diminish somewhat in 2012, but the unpredictable nature of the market will be a key factor influencing IPO decisions for the next 12 months at least.
2. Managing execution risk
Questions about valuation and after–market performance remain front of mind for IPO candidates, but execution risk has become a primary concern. With pricing conditions changing so quickly and a record number of companies having to withdraw their listing plans, candidates are worried about whether they will be able to complete their public offering.
On the upside, investors have grown tolerant of companies that announce plans for an IPO and then delay a listing until the timing is right. But they will still penalize those that decide to bring a deal to the market, only to scrap their plans because they lack support. The elevation of execution risk changes the way companies need to plan for their IPO.
3. Prepare early, move fast
Two key factors will increase an IPO candidate’s chances of completing a listing and on favorable terms this year: begin listing preparations earlier than normal, and be ready to move a lot more quickly once a viable market window opens. Globally, some IPO markets are better suited to an accelerated listing process than others.
But wherever they plan to list, IPO companies need to ensure they have a clear, compelling story to tell investors, with the transparent financial information needed to back it up. Likewise, candidates will need to be confident that they have identified and managed any risks that might slow down the listing process or derail it entirely.
4. Companies to keep an open mind
The difficulty of taking a company public encouraged many IPO companies to think more creatively about where they might list last year. We expect this trend to continue in 2012.
Rather than simply listing on their national market by default, we saw several European companies take some or all of their IPO to Asia or the US.
Newer forms of equity financing, such crowdfunding portals enabling direct access to investors and newcomers like important multilateral trading facilities entering the listing business, also became more appealing to IPO companies. With the market conditions likely to remain challenging through 2012, companies need to take a broad view of their funding options.
5. Central bankers hold the keys
The sovereign debt crisis in Europe and other nations exhibiting slower economic indicators weighed heavily on global IPO markets last year. The failure of policymakers to agree upon a clear solution to the Eurozone’s fiscal difficulties was the main reason why IPO activity virtually ground to a halt in the second half of the year.
As 2012 moves forward, the outlook is brighter. Europe has made progress toward fixing its problems and the US economy has improved. Globally, there is a very full pipeline of profitable, capital–hungry businesses eager to go public.
Nonetheless, the keys to a sustained IPO market recovery will, largely, remain in the hands of the world’s central bankers and sovereign leaders through 2012.
6. Remember, companies are profitable
While 2011 was a difficult year for the global economy, it’s worth noting that companies — overall — are profitable. Earnings growth for the S&P 500 was around 9% for the fourth quarter of last year. That continued a downward short–term trend, although some sectors performed far better than the average, with industrials and technology companies both above 16%.
Across the S&P 500, earnings growth rates are forecast to be rising again in the second half of 2012. Earnings growth among Asian companies is also strong and accelerating. A vibrant IPO market needs at least two ingredients: profitable, capital–hungry companies and a positive equity market sentiment. Strong corporate earnings growth helps to deliver both.
7. Learning from Facebook
Learning from Facebook. One deal does not make a trend, but IPO companies in other sectors can learn a lot from studying the recent new–listing experiences of social media and internet companies. To keep the offer price high and to minimize execution risk, companies may offer relatively small slices of their total capital.
8. Private equity will show its strength
The proportion of successful IPOs involving private equity firms increased to record levels last year. Globally, firms exited 118 companies, raising around US$38.3b, representing 23% of total IPO proceeds.
In the US, nine of the year’s ten biggest IPOs involved private equity–backed companies. Partly, the high proportion of private equity deals in the market is due to the fact that many companies that didn’t have private equity involvement decided to cancel or delay their listing plans. It also shows how private equity firms have become more nimble; when market windows opened, they were ready to move quickly.
With an estimated US$375b in dry powder in May 2012 and their investment portfolio aging rapidly, we expect private equity firms to be significant IPO players again in 2012. There was also a rise in venture capital (VC) backed IPOs globally in 2011, this is expected to continue in 2012.
VC firms exited 141 companies in 2011, raising around US$17.3b via IPO, representing 10% of total IPO proceeds. In May 2012, venture capital firms hold an estimated US$115b in dry powder.
Read more on the following topics: