‘IPO” is not an acronym for “inundated by public offerings.” Given what’s happened so far in 2014, though, it might as well be.
The initial public offering market in the U.S. is red hot, with research firm Renaissance Capital reporting that the second quarter saw the highest number of IPOs since the height of the tech bubble. The number of IPOs was up 36 per cent from the second quarter of 2013, and the parade is likely to continue in the second half of the year: IPO filings, in which companies announced intentions to go public in a matter of months, were up 54 per cent over 2013’s second quarter. (Last year, it should be noted, was the best since 2000.)
Canada’s IPO market, always much smaller, has still had a banner 2014 so far. The $2.1-billion raised by the five second-quarter IPOs on the Toronto Stock Exchange, led by $1.5-billion from PrairieSky Royalty Ltd., is the biggest dollar amount since 2010’s second quarter – which was the best quarter in the past 10 years, according to PricewaterhouseCoopers Canada.
“The macro conditions are pretty solid for stock markets in general – you see many going to all-time highs – and whenever you have plenty of risk appetite in the market as a whole, the IPO market really benefits from it,” says Josef Schuster of IPOX Schuster LLC, a firm that maintains IPO indexes that underlie exchange-traded funds. “And investors have become more comfortable in investing in IPOs.”
Mining companies have traditionally driven Canada’s IPO market, but when the sector slumped in 2013, a number of retail-related real estate investment trusts picked up the slack, says Dean Braunsteiner, national IPO services leader at PwC Canada. After they ebbed, there were no significant IPOs in the first quarter, leading to fears of an awful 2014, he said.
Rising equity markets and Encana Corp.’s decision to spin off assets into PrairieSky in its May IPO have brightened the outlook, though. “I think you’ll see companies in the energy sector, similar to what PrairieSky did, looking at their portfolio of assets and saying: ‘Do we have something here that we’re not getting full value for in our market valuation?’” Mr. Braunsteiner says. “Companies can then capitalize on that and bring those assets to market as a separate IPO, which then provides financing for the core businesses.”
Through the first six months of 2014, however, investors are finding it’s slightly harder to profit from U.S. IPOs, according to our analysis of data provided by Bloomberg. To gauge the true benefits of IPO investing, we track the return not only from the offering price – at which typically only big investors can buy in – but also from the first-day closing price. Then, we compare those returns to a broad index in each country (the Standard & Poor’s 500 in the U.S. and the S&P/TSX composite index here).
In 2013, the evidence suggested that IPO investing wasn’t the sucker’s game that so many market watchers allege, with more than half of U.S. IPOs outperforming the S&P 500 from their first-day close, with many beating the index by 10 to 25 percentage points or more.
At the halfway point of 2014, however, the results aren’t looking as good. It’s still profitable to get in early, as 94 of 153 U.S. IPOs in our data beat the benchmark from their offering prices. But when the returns are calculated from the first-day close, only 69 of the 153 are beating the S&P 500.
In Canada, it’s hard to extrapolate from just five offerings, but the results are better. While most of PrairieSky’s gains came on its first day of trading, it has still managed to slightly beat the TSX composite from that point on. The same is true of Callidus Capital Corp., a lender that went public in April.
The clear winner is Lumenpulse Inc., an LED light maker that delivered a gain of nearly 15 per cent on its first day of trading in April and has continued to zoom. Even investors who bought at the first day’s close have managed to beat the TSX composite by nearly 20 percentage points.
Journey Energy Inc., a Calgary exploration and production company, is down slightly from its June 19 offering price and underperformed the TSX composite in its eight days of trading through June 30.
In the United States, one of the top-performing IPOs looked like a clunker on day one. Vital Therapies Inc., a revenue-free developer of a treatment for liver failure, was flat on its April debut. Since then, however, the shares have more than doubled, making it the only U.S. IPO to outperform the S&P 500 by 100 percentage points for those who bought it at the first day’s close.
Half a dozen IPOs have gained more than 100 per cent from the offer price, including Zoe’s Kitchen Inc., a fast-growing Plano, Tex., operator of Mediterranean restaurants, and GoPro Inc., the maker of helmet-mounted high-definition cameras for the athletic that debuted in the waning days of June.
The depths of the IPO list are littered with pharmaceutical and biotech companies, illustrating the perils of investing in sales-less firms that are still in the hoping stage for revenue. Eleven IPOs have lost 20 per cent or more from their offering prices, meaning their performance relative to a rising S&P 500 looks even worse.
Such speculative companies will likely continue to tap U.S. markets. But as we look to the remainder of the year in the Canadian IPO market, expect more-established firms, Mr. Braunsteiner says.
“There’s certainly pent-up demand in Canada for IPO activity, but I think the clear signal from the investment community is we’re looking for opportunities that have proven revenue generation,” he says. “They may not yet be profitable, but there’s an expectation for profits in the shorter term.”
That might also translate into a quiet second half in the Canadian IPO market – but, perhaps, better results for investors.
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2014 Canadian IPOs on the TSX
|PrairieSky Royalty Ltd.||PSK-T||5/29||$1,528||38.6|
|Callidus Capital Corp.||CBL-T||4/23||$260||27.9|
|Journey Energy Inc.||JOY-T||6/19||$182||-1.7|
Top-performing U.S. IPOs
|Ultragenyx Pharmaceutical Inc.||RARE-Q||1/30||$139||128.1|
|Zoe's Kitchen Inc.||ZOES-N||4/11||$101||125.3|
|Vital Therapies Inc.||VTL-Q||4/16||$62||114.5|
|Revance Therapeutics Inc.||RVNC-Q||2/5||$110||109.1|