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After Banner Year, IPO Parade Marches On

Jan 01, 2015 12:06:00 (ET)

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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(END) Dow Jones Newswires

January 01, 2015 12:06 ET (17:06 GMT)


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