As we get deeper into second half of 2011, many companies are taking a closer look at their capital-raising strategies. Some are expressing interest in an Initial Public Offering (IPO) of their securities. Whether or not your company should seriously consider an IPO and whether it is appropriate to pursue one is for a future article. I want to address whether or not now is a good time to pursue an IPO—assuming it’s within the realm of realistic possibility for your company.
What kinds of companies are IPOing?
At the moment there are several types of companies actively pursuing IPOs:
- Technology companies at earlier stages of growth that have won broad support from leading venture capital firms and private equity firms
- Social technology companies that are at early stages but have experienced extreme—even unprecedented—levels of growth in revenues even if profits are non-existent
- More established firms that have achieved success organically, are cash flow positive and have a clear strategy for investing the proceeds of an IPO
What sectors are hottest?
Companies that operate in technology, energy, health care and biotech sectors will dominate IPOs during the second half of 2011. Technology will be the hottest, which is no surprise considering companies like Groupon, LivingSocial and Pandora have already announced their IPOs at a spectacular scale.
Does this translate into a positive sign for the IPO market across all sectors? One way to answer this question is to ask the experts that manage these transactions.
What do the bankers think about IPOs?
BDO USA, LLC a leading accounting and consulting firm, recently conducted a survey of leading investment bankers across the country. These are the people that pitch IPOs to companies, manage companies through the process, gauge investor interest in IPOs, and have an overall sense of where the IPO market is headed.
Fifty-nine percent of respondents expect increased IPO activity during the second half of 2011 compared to the first half. Nearly one in five respondents expect this increase to be substantial. Twenty-eight percent expect the same level of activity when compared to the first six months of the year. Therefore 87 percent expect the same or more activity during the second half of 2011. This is extremely bullish. In dollar terms, these investment bankers expect IPOs to raise a total of $57 billion for all of 2011 with average proceeds per IPO of $368 million.
Why is now a good time to consider an IPO?
Successful IPOs are a function of numerous factors. Most important is the appetite among the institutional investor community for investing in these types of transactions. At the moment, there is considerable interest. Institutional investors are faced with few options for earning a good return on their significant assets. The rates of interest earned on their less risky investments are at near all-time lows. Any opportunities that carry a manageable level of risk and can produce attractive returns are more than welcomed.
Additionally, key sources of companies to IPO are private equity and venture capital portfolios. These funds are looking to unlock returns and liquidity from their existing investments in anticipation of a difficult short-term outlook.
This pressure, combined with the appetite for return among institutional investors make it a good time to consider an IPO if your company is ready. While it’s expected that privately-held, owner-managed companies will only comprise around 16 percent of IPOs during the remainder of the year, the odds are better now than a year from now that you can have a successful IPO.