By Telis Demos
The U.S. IPO market in 2014 enjoyed its best year in more than a
decade, thanks in part to Alibaba Group Holding Ltd.'s record $25
billion debut. But given the lack of another blockbuster deal on
the horizon, an anticipated interest-rate increase and the recent
tumble in energy prices, some slowdown in 2015 looks
inevitable.
Participants still believe the IPO market will remain strong,
though, with money still pouring into equities and fresh offerings
coming.
IPOs of companies listed in the U.S. raised $96 billion across
293 deals in 2014, according to Dealogic. Both figures were the
highest since 2000, the crest of the dot-com frenzy, when 432 IPOs
raised $105 billion.
An increase in interest rates, largely expected to arrive in the
second half of 2015, could act as a headwind, as it could create
more attractive alternatives to yield-oriented IPOs, such as those
of real-estate investment trusts or natural resources partnerships
that are required to pay out their earnings as dividends in order
to avoid taxes.
Moreover, given the steep decline in prices for oil and gas, the
energy sector in 2015 looks unlikely to match the $8.7 billion
worth of IPOs it contributed the year before.
Nevertheless, both the supply and demand sides of the IPO market
look strong, bankers argue. On the supply side, "the pipeline we
have now is as strong as it was a year ago, if not stronger," said
Evan Damast, global head of equity syndicate for Morgan
Stanley.
Already, a handful of companies have filed for potential 2015
IPOs, including burger chain Shake Shack Inc., consumer lender
OneMain Financial Holdings Inc., and chemicals distributor Univar
Inc.
Mr. Damast said that on the demand side, the lack of a huge deal
to attract investors could help other offerings. "Megadeals create
a lot of headlines and interest. But the absence of one also means
investors will need to look at 10 deals for the year, rather than
two," said Mr. Damast.
He also said that investors who were putting more money to work
in stocks generally would still see IPOs as a way to quickly build
up big new positions. Investors overall plugged $37 billion into
U.S.-based equity funds in the week ended Dec. 24, the largest
weekly inflow recorded by Lipper since 1992. When these funds put
money to work, they often buy into IPOs, rather than try to build
up positions in existing public companies whose prices already have
soared.
"New issues provide investors with quick liquidity in large size
unlike the gradual pain of putting on new positions in the open
market. That need isn't getting any smaller," he said.
And IPOs in 2014 again delivered share-price gains that beat the
broader market, rising 18.9% from their offer price versus a gain
of 11.4% in the S&P 500.
Among the biggest gainers was Alibaba, the Chinese e-commerce
company, whose shares jumped 38% in first-day trading, and have
gained a further 13% from there. Radius Health Inc., a maker of
drugs for osteoporosis and other conditions, was the top-performing
IPO in 2014, rising 375% from its offering in June through
Tuesday.
"A lot of investors realized that on a fundamental basis
[stock-market] valuations weren't stretched, so they started to put
money to work again in new companies," said David Hermer, global
head of equity capital markets at Credit Suisse Group AG. "Supply
of IPOs won't be significantly down" in 2015, as long as the stock
market itself remains strong, he said.
Some other deals' performance were more up-and-down, however.
The two companies with the biggest first-day jumps in 2014, drug
maker Dicerna Pharmaceuticals Inc. and health-care software firm
Castlight Health Inc., which popped 207% and 149%, respectively,
were up 7% and down 28%, respectively, through Tuesday.
Unlike in prior years, when market volatility led investors to
abandon IPOs, offerings continued throughout 2014 despite periods
of turbulence. Deals priced even during the most violent
stock-market selloff in early October, when S&P 500 index
dropped as much as 6%, and in early December, when it slipped 5%.
Lending Club Corp., in December, and Dominion Midstream Partners
LP, in October, jumped more than 25% in first-day trading during
those periods.
Other sectors in 2015 could pick up slack from energy, including
consumer-facing companies. For example, Virgin America Inc. was up
89%. Consumer product, restaurant and hotel IPOs--a group including
camera maker GoPro Inc., and burger chain Habit Restaurants
Inc.--outperformed all other sectors, gaining on average 57% from
their offering price through year-end, according to Dealogic.
Biotechnology companies also will continue to hit the market,
drawn by the strong performance of IPOs in 2014.
"Companies that are more growth-oriented and dependent on growth
in U.S. economy will benefit from lower oil prices, so we'll see
more activity there," said J.D. Moriarty, head of U.S. equity
capital markets at Bank of America Merrill Lynch. That group
includes consumer-products makers, retailers and some Internet
companies. But "activity going on in energy is not going to be
entirely replaced by consumer and retail."
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