There are a lot of ways the capital markets could improve in 2012, but becoming a hotbed for new equity issuers is not likely one of them, at least according to a recent survey of about 100 investment bankers.
As of last month, only half are predicting an increase in initial public offerings in 2012, says BDO USA’s annual study, compared with 72% who held that rosy outlook at the start of 2011. Thirty-five percent of bankers surveyed expect the number of IPOs to remain flat in 2012; 15% expect a decrease in offerings.
The results “are not a big surprise, and the lower confidence is for fairly obvious reasons: lack of confidence in both domestic and global economies,” says Brian Eccleston, a partner in BDO’s capital markets practice. Still, “there seems to be a perception of some stabilization with modest growth,” he adds, “at least stopping the bleeding.”
The overall predicted growth in the number of IPOs averages out to 6%, or about 133 offerings, compared with last year’s 125, according to Renaissance Capital’s count (see chart, below). The average expected long-term return is 3% per offering in BDO’s survey, compared with the robust 18% average return predicted last year.
To be sure, these predictions are in some ways a reflection of the past. The optimistic 2011 projections were buoyed by a relatively strong IPO market in 2010, with no accounting for the U.S. and European debt crises that brought market debuts to a grinding halt last summer. The lower volume and lower returns expected this year are likely colored by last year’s difficult second half and the negative 11.8% return that the average IPO yielded last year, according to data from Renaissance Capital.
But buried in the averages for 2011 are some positive trends. Renaissance Capital notes that 24 Internet stocks, including LinkedIn, Groupon, and Zynga, went public in 2011, the highest number in a decade. Average deal size also increased between 2010 and 2011, notes Eccleston, particularly if General Motors’s supersized $15.8 billion 2010 IPO is excluded from the figures.
And the pipeline for 2012 looks strong. Renaissance Capital counts S-1 filings from about 200 companies, the highest level since 2000, according to its data. Those filings include some well-known names, such as private-equity-backed Toys “R” Us and AMC Entertainment. The so-called shadow inventory of companies that haven’t yet filed to go public but are likely to do so is also robust, including Facebook, online fashion retailer Gilt Groupe, and Chrysler.
“The expectation is that the deals getting done are still going to be pretty high quality, and with a high average deal size,” says Eccleston. Some of that trend is driven by the fact that many companies are more mature when they get to market, or are established firms that were taken over by private-equity firms. Private-equity-backed deals accounted for 28% of the number of IPOs in 2011, but 56% of the proceeds, according to Renaissance Capital.
On the industry front, there looks to be little change ahead. Technology, energy, and health care were the most represented sectors in 2011, and got the most votes from bankers for being likely to increase in 2012.