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The IPO Market

I was asked on my recent trip to New Zealand about the US IPO market. Somewhat fortuitously I received an email from America’s Growth Capital with a good summary. Here is the rub:

The U.S. IPO market thrived in the 1990s, averaging more than 500 IPOs per year over the entire decade.  However, as we entered the new millennium, the once vibrant IPO market drastically shrank, not only because of the implosion of the Internet bubble, but also due to the following reasons: i) the market cap threshold of targeted investments for mutual funds increased as these funds ballooned; ii) the most active IPO underwriters either disappeared or moved up-market; and, iii) overzealous regulation and costly litigation significantly deterred both executives and private equity players.

These factors led to the dip in IPO volume that we saw from 2001 – 2003; however, the U.S. market has clearly rebounded with a strong finish in 2006.  In Q406, 89 IPOs were priced- the highest quarterly total the market has seen in recent years.  228 IPOs were priced in 2006 on U.S. exchanges, compared to 202 in 2005, an overall increase of 13%.  So far in 2007, 48 IPOs have priced, compared to 40 IPOs at the same time in 2006 (as of March 16). The tech IPO market saw 41 deals priced in 2006, the same number as in 2005.  Tech IPO filings increased by 35% from 2005 (51) to 2006 (69).  Expect substantially more tech IPOs in 2007-2008 compared to the post-bubble doldrums of 30-40 IPOs a year.

We believe that this increase can in part be attributed to an influx of private companies that sat on the sidelines during unfavorable market conditions and are now considering going public.  Most are successful later-stage companies with $30-100 million in revenues.  While many of these companies need capital for growth or liquidity, they may be unwilling to raise another round of private equity due to unattractive private valuations and often onerous liquidation preferences.  In other cases, these companies do not yet want to sell to a strategic acquiror or have not generated a compelling offer.  In early 2007, there is now an abundance of private companies that are proven with strong market penetration, established customer bases, and demonstrable growth and profitability (or near-profitability).  However, these private companies do not meet the minimum IPO criteria as determined by the bulge bracket banks and traditional large fund IPO investors.

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