Proskauer’ IPO Study

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Welcome to the second edition of Proskauer’s IPO Study, our analysis of market practice for U.S.-listed initial public offerings.

We examined 119 U.S.-listed IPOs with a minimum deal size of $50 million in 2014, representing about half of the overall market for deals meeting those criteria. Our study covered a range of industries and included foreign private issuers and master limited partnerships, but excluded certain uncommon deal structures. (See page 5 for a description of our methodology.)

This edition expands on last year’s in several important ways. Collectively, these enhancements widen our perspective and, in the process, deepen our analysis.

  • We have two years of data, enabling us to identify trends and make year-over-year comparisons.
  • We’ve added energy & power to the industries covered (i.e., health care; technology, media & telecom; consumer/retail; financial services; and industrials).
  • We’ve added an appendix focusing on foreign private issuers, as 2014 experienced a meaningful return of IPO issuers from Europe and Asia.

The study draws from the proprietary IPO database that we created for the first edition and have subsequently expanded and enhanced. We believe the database is a valuable resource for companies considering an IPO as well as for IPO market participants and their advisors.

It was a good year for the IPO market

The IPO market was buoyant in 2014. The 275 total U.S. IPOs raised aggregate proceeds of $85.3 billion — numbers not seen since before the Great Recession. Sixteen IPOs raised at least $1 billion (including the longawaited debut of Alibaba), the most in any year since 2001.

Investors gave IPOs a big boost by buying them in the aftermarket. IPOs’ average total return during the year was 21 percent, exceeding their 15 percent 10-year average and nearly doubling the Standard & Poor’s 500 Index’s 11.4 percent return.

In a possible harbinger of things to come, non-U.S. companies returned to U.S. exchanges for their IPOs. This reversed a long trend of non-U.S. companies generally avoiding U.S. listing because of perceived regulatory constraints.

IPO markets

Key takeaways

The study yielded a number of noteworthy observations about trends and practices among the IPOs in our database in 2014:

A tale of two halves. In a reflection of investors’ shifting risk appetite during the year, IPOs struggled to price in the range in the second half of the year vs. the first half. In our study, 45 percent of second-half deals priced below the range, compared to 25 percent of first-half deals. Second-half deals also generally underperformed first-half deals in the aftermarket.

Appetite for both megadeals and smaller, growth stories. Led by Alibaba, the market was able to absorb large IPOs from several sectors, including financial services (notably Citizens Financial and Ally Financial). The market also saw significant deal count of IPOs raising under $100 million, led by growth-story IPOs in biotech/biopharm within the health care sector.

Earnings not necessarily required. Ten percent of IPOs were for pre-revenue companies, all of which were in health care. Fifty-five percent reported negative net income in their most recent audited fiscal year, primarily in health care and technology, media & telecom. While a majority of companies in each category priced below the range, pre-revenue issuers had significantly better aftermarket performance than those in the study with negative net income.

SEC process was more efficient. The average number of first round SEC comments in 2014 was 38, down from 42 in 2013, and the average time period between first submission/filing and pricing was 124 days in 2014, down from 135 in 2013.

Bigger deals meant higher average expenses. Average total IPO expenses (excluding underwriting fees) rose eight percent from 2013 to 2014. This was mainly due to the number of large, complex IPOs, which were considerably more expensive to execute than smaller IPOs. Although total legal, accounting and printing fees were significantly higher for larger IPOs, they were lower when measured as a percentage of the IPO base deal.

Better performance when insiders bought. Insiders (most frequently at health care issuers) bought shares in 24 percent of IPOs, of which about half priced below the range. Their instincts were good, as aftermarket performance for deals with insiders buying was much better than for those without insiders buying. The opposite was true when management sold shares in IPOs with a secondary component. Nearly 60 percent of such deals priced above the range, but aftermarket performance was meaningfully lower than when management didn’t sell.

IPO markets

IPO markets

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