Scott Cutler is Executive Vice President and Head of Global Listings at NYSE Euronext.
Mr. Cutler is responsible for the NYSE listing...
As of September 30, the backlog for IPO filings in the U.S. is the highest backlog of any quarter in the past 10 years at 498 deals. (see above chart)
When you remove the stale deals which have been on file for over two years, Q32011 still has the second highest backlog of any quarter in the past 10 years, second only to Q32007. Digging deeper into our backlog, we see strong pockets in financials, energy, technology, and consumer cyclicals. We also track dark pipeline of confidential international issuers seeking U.S. listings, with such pipeline also at the highest levels in years.
But how and when will this backlog convert into new initial public offerings? We believe two factors need to change before the sideline of IPOs toe the line.
First, the VIX needs to drop below 30.
Here we compare U.S. IPO conversion percentages to the CBOE Volatility Index (VIX). The VIX is widely used as a measure of market risk and is often referred to as the “investor fear index.” Historically, as the VIX rises above 30, IPOs drop dramatically, which makes sense as values greater than 30 are typically associated with high volatility in the trading markets from investor fear of uncertainty. From a technical perspective, a VIX reading of 30 represents an expected annualized change of 30% over the next 30 days. This implies that the options market expects the S&P 500 to move up or down 8.66% (30%/ (12)^(1/2)) over the next 30 days. Higher uncertainty leads to larger swings in valuation, difficulty setting an appropriate IPO pricing range, and investors preferring to sit on their hands than make new investments. So, we are watching -30 VIX as the first indicator of a returning IPO market.
Second, we need more certainty out of Europe. One cannot watch the news without mention of Greece, Portugal, Spain, and Italy having huge real-time impacts on the market. The market fears the threat of contagion, the massive exposure to European financial institutions, and the collective negative impact on global growth. After visiting with the Prime Ministers of Canada and U.K. last week, UNGA week appeared solely focused on Europe’s problems. A guarantee, a backstop, a clear path, and a plan is what the market wants and needs. The last few days have inspired a little confidence that the vested interests in keeping the European union together will create a path forward, but the market wants more certainty.
These two factors are obviously related, but once unlocked, the flood of new issuance will rush to a willing, deep pocketed market. Billions of dollars in cash is parked on the sidelines earning no interest, and IPOs represent a great opportunity to buy for growth.
I don’t think the return is too far around the corner.