The first quarter of 2014 was one of the most active for US initial public offerings in years.
There were 71 public company debuts during Q1, a 109 percent increase over the 34 IPOs completed during the same period last year, according to research from PwC. Proceeds from IPOs during the first three months of the year totaled $11 billion – a 41 percent increase on the $7.8 billion raised during Q1 2013.
Data from IPO research firm Renaissance Capital largely corroborates the PwC study. Renaissance says there have been 64 IPOs priced in the US so far this year, raising a total of $10.8 billion – a 39.5 percent year-on-year increase.
Although this level of IPO activity represents a continuation of the particularly active IPO market in 2013, it is rare for so many public market debuts to take place during the first quarter, says Neil Dhar, PwC’s US capital markets leader.
“The first quarter is usually slow because typically people wait until year-end numbers are ready, and there’s a dip,” he says. “To have as big of a quarter in regards to number of issuances is great news.”
The spike in IPO activity can be attributed to the improving US economy, growing confidence among chief executive officers and interest rates that remain at near-record lows, according to PwC.
It also has a lot to do with private equity. IPOs of private equity-backed companies accounted for 75 percent of US activity during the first quarter, up from 50 percent during Q1 2013 – with substantial participation from businesses of all sizes.
“New IPOs have been a terrific exit vehicle for private equity, and we’ve seen that across the patch for small, big and medium sized-investments,” Dhar says.
Healthcare-related IPOs dominated the market in Q1, comprising nearly half the total IPOs for the quarter (35), followed by technology-related offerings (13).
“Investors are searching for yield, and healthcare and technology are on the higher end of the risk spectrum,” Dhar says. “That’s why those two specific sectors were very hot in the first quarter and last year as well.”
Despite the high volume, PwC data shows that healthcare IPOs only raised a total of $2.2 billion, underscoring the developmental nature of many healthcare offerings, especially in the biotechnology and biopharmaceutical sectors. The IPO of Venrock-backed health software company Castlight Health was the stand-out for the quarter, with shares jumping 149.1 percent on the first day of trading.
Happily, this surge in IPO activity during Q1 has continued into the second quarter, with nine new IPOs during the first two weeks of April.
“There’s a lot of really good companies in the pipeline that are going to be looking to come to the marketplace, so I think that bodes well for not only the second quarter but for the rest of the year,” Dhar says.
He points out that geopolitical upheaval like the escalating crisis in the Ukraine may yet have a damaging effect on global financial markets – and thus on investor sentiment towards IPOs, since this particular market “does not like volatility”.
However, there have clearly been some positive changes in the market in recent months – particularly with regard to speed of execution, according to Dhar.
“Because the market can open and shut very quickly, companies, boards, financial sponsors and management are being a lot more diligent in preparing their marketing materials, roadshow materials and regulatory docs that need to be reviewed by the SEC,” he says.
“I didn’t see that two or three years ago, and the reason that’s happening is because these windows open and shut very quickly. Companies don’t want to be on the outside looking in because they didn’t have something ready.”