I focus a great deal on IPOs in my role at the NYSE Euronext and I came into the new year wishing we could see a market with the following dynamics:
- Rising indices that put investors at ease as opposed to on edge with fires (i.e., declining prices) in their existing investments
- After a year in 2011 where we saw north of 1+ trillion of negative outflows from equity funds, some rotation back into equity as an asset class
- A drop in the VIX below 20 (please Europe, give us a break!)
- A solid backlog of companies ready to tap the markets, raise capital, hire people and build their companies.
And guess what, I should have bought a lottery ticket rather than dream about that scenario because we’ve actually almost done it. We have all three of these factors: a very good backlog of companies, the Russell 2000 is up 10.8% YTD, and the VIX is at 19.7 (average close YTD) – well below the “warning Will Robinson” levels we’ve seen when the world is falling apart. We've had 2 positive weeks in the last four for equity funds flows but we know there is significant cash still on the sidelines that can serve to kickstart the IPO market.
In 2012 to date, we’ve seen seventeen (excluding CEFs) IPOs price. This is a solid group of companies tapping the market in the seasonally active window from end of January to mid February. Guidewire priced on January 24th above the range and has since traded up more than 70% (+29% price to open and the rest in trading since). Overall the statistics look pretty good – median IPO size of $67 million with a median market cap of $288 million (surprised they are so small?) and median returns of 10% price to 1-day close as well as 14% price to YTD (admittedly a small date range).
But if you peel back the onion a bit, you see that we actually had eleven out of the seventeen IPOs price below their ranges, and five within range. Only Guidewire priced above. There have also been five postponed deals year to date. It's been a long time since I heard the "value" label applied to the top three to five investors in an order book for a small cap tech story. But that's where we are as we take breather from pricings. So, what's next? What is or isn't happening?
It appears that despite all these positive factors in place, growth investors aren't willing to "put the risk trade on" as our underwriter friends would say. That's interesting to me put against the backdrop of a comment from value investor Ron Baron of Baron Capital who said last week on CNBC, "stocks are at the lowest level - the most attractive level of my lifetime". How do these two factors co-exist? I think investors are still nervous about the risk and relative illiquidity of a newly public small cap company when they can buy a similar, more liquid stock, with a long track record of performance at a perceived value price.
The punch line is, you can get your deal done but it is truly a negotiation with investors after the range is set. Hopefully those ranges are still attractive to entrepreneurs, VCs and PE owners because we need deals to launch and for this part of our economy to build some momentum.
So I'm adding a fifth wish which is for equity investors jump back in and put the risk on trade back on.