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2012 in Review – IPO Market Manages Slight Momentum

Despite the cynicism of the public market following the Facebook debacle, the IPO market actually managed marginal improvements for 2012, though its success was severely hampered by Facebook and similar market disappointments such as Zynga, according to Renaissance Capital’s 2012 Annual Review of the US IPO Market.

The IPO market started 2012 out with a bang, providing the fastest start since 2000 with Facebook, the most anticipated public offering in years, right around the corner. The dismal performance of Facebook, as well as similarly high anticipated IPOs like Groupon and Zynga that also failed to maintain their initial pricing, severely weighed down the overall IPO market. However, 2012 was not a year to get cynical. Raising $43 billion, the IPO market for 2012 earned the highest level of proceeds since 2007, with a 17 percent total return that outdid expectations. Excluding Facebook, however, that number falls 27 percent. The year saw 128 deals, a meager 2 percent improvement over last year.

In addition to market fallback from Facebook, the passage of the JOBS Act which allowed smaller companies to file effectively cut the IPO pipeline in half.

Though Facebook’s performance did not help, the year saw a 14 percent average first day “pop,” the highest in a decade. Though private equity deal flow rose, a drought of large deals dropped proceeds by 50 percent.

Yet despite the last three years of recovery, US IPO activity continues to lag behind the historical 150 to 200 annual deals. Excluding such large IPOs as this year’s Facebook, GM in 2010, three large venture backed companies in 2011, the annual proceeds from the US IPO market still lag under $30 billion.

Technology continues to dominate the public markets, making up 30 percent of all deals and 48 percent of the proceeds. The financial sector also saw an increase in deal flow, making up 20 percent of deals and 17 percent of proceeds.

Despite the fact that energy companies made up three of the top performing public offerings in 2011, alternative energy contributed to the six worse IPOs in 2012.

The pipeline for Internet IPOs was effectively closed following Facebook. Not counting the social media giant, a total of 13 Internet IPOs raised $90 million, about 43 percent fewer deals than the year before. The year started strong with seven Internet IPOs in the first quarter, compared to four in the first quarter the year before. Groupon and Zynga, which went public in 2011, suffered massive losses. This combined with Facebook’s similar drop in value following its public offering pretty much shut down the IPO market for Internet startups. Only five Internet companies went public after Facebook, four of which were completed after August.

With only two deals completed, IPOs in China reached the lowest since 2003 for an 83 percent decline from 2011 and a 95 percent decline from 2010. Investors seemed wary of fraud in the country, paricularly following SEC investigations of Chinese auditors. Economic downturn in China also contribued, with fewer deals going forward on the Hong Kong and Shanghai exchanges.

“US IPO activity has also been below the levels we would expect in a normal economic rebound because of the tepid nature of the current recovery (unusually slow GDP growth and ongoing high unemployment) despite unprecedentedly expansionary monetary policy,” the report stated. “…The good news is that the IPO backlog, including the large shadow backlog, continues to grow, and IPOs by smaller companies actually rose in 2012. To see a good year in 2013, the IPO market will need not only a constructive resolution to the fiscal cliff, but also a steadier recovery in the broader equity markets.”

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