The completion of initial public offerings in the second half is under great pressure, PwC US says in its IPO latest report. And, in general, it worries that a once-promising year now could develop into a relative dud.
While holding out the prospect of a turnaround, the PwC IPO Watch “special focus” notes that the loss of market stability and corporate confidence have been damaging. The report calculates that 79 offerings were completed through June 30, generating $24.3 billion in proceeds — an amount sharply higher than the $9.4 billion raised by 70 IPOs in the prior year’s first half. But now, “disruptions in the overall market and a variety of recent macroeconomic events may present considerable challenges for companies looking to execute an IPO in the coming months,” according to Henri Leveque, leader of PwC’s Capital Markets and Accounting Advisory Practice. “The summer months, particularly August, are typically a slower time for IPO activity, so it will remain to be seen how quickly market stability and confidence returns and whether those companies waiting in the wings will move forward with their IPO plans come September.”
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Tracing the effect of the uncertainty — especially that caused by chaotic global stock markets — PwC US says that the investor appetite for IPOs in the short term has been hurt. In the second week of August, there were 12 IPOs scheduled to price, but six were postponed as of the middle of last week.
The Shock of an Index
The unit of PricewaterhouseCoopers points to the S&P 500 Volatility Index, which is an indicator of investors’ IPO appetite, and noted that it had jumped to over 47 last Tuesday, indicating increased caution for potential IPO investors. With the exception of a March spike, that index had been on steady decline for over a year, and was approaching 15 — a level favorable for pricing IPOs.
The lowest volatility rating in recent years, at the end of 2006, approached 10, which coincided with a high in IPO activity. Still, according to PwC, the current jump is far from the 89 level of October 2008, when IPO activity hit at an all-time low. Looking at the bright side, PwC’s report says that if the index declines during the rest of August and into early September, IPO activity could restore the “prior buoyant levels of activity for the balance of 2011.”
Short-term market events often don’t impact the process companies undertake to prepare for an IPO, PwC says. “Companies that successfully execute an IPO in the coming months will have taken a long-term approach and undergone careful planning, thereby helping them to be ready to successfully navigate unforeseen market events,” according to Leveque. “Potential issuers often underestimate the time and effort that goes into embarking on life as a public entity. No one can predict when the window will open or shut; however, companies that are well-prepared will have the flexibility needed to take advantage of market conditions and be able to access the IPO market when the timing is right.”
PwC rates IPOs as among the higher-risk investment options for companies because of the limited track records that IPOs have. “The underlying business of a potential issuer becomes more important in a difficult funding environment,” Leveque says. “Those issuers with businesses that are somewhat immune to economic downturns are more likely to be able to go to market than issuers that are heavily dependent on the consumer or general economic strength.”
He adds, “We expect to see solid companies with good business fundamentals succeed despite market volatility through IPOs and other viable avenues for investment, including the private placement market, which provides another avenue to bring cash from the sidelines into the U.S. economy for jobs, research and development, investment in capital equipment, and the creation of more goods for sale and purchase by consumers or businesses.”
PwC US IPO Watch is a quarterly and annual survey of IPOs listed on U.S. stock exchange. It includes both domestic and foreign companies.