According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, capital markets executives at leading investment banks are somewhat divided when asked to forecast initial public offerings (IPOs) on U.S. exchanges in 2015. Forty-three percent predict an increase in U.S. IPOs in the coming year, while more than a third (35%) forecast activity as flat compared with 2014. A smaller proportion (22%) expect a decrease in offerings on domestic exchanges. Overall, bankers predict a 2 percent increase in the number of U.S. IPOs in 2015. They anticipate these offerings will average $303 million in size, which projects to close to $85 billion in total IPO proceeds on U.S. exchanges, almost equal to 2014.
“Given the robust performance of the U.S. IPO market during the past two years, this forecast of continued growth in the number of offerings - even two percent - is actually quite positive. If accurate, it will represent a fourth consecutive year of increased IPO activity on U.S. exchanges," said Wendy Hambleton, Partner in the Capital Markets Practice at BDO USA. "Given the current momentum behind IPOs and the performance of the broader market, the bankers' forecast for continued growth in offerings seems well founded. However, when you consider that more than a quarter of last year's proceeds were attributable to the Alibaba IPO alone, we would question whether it is reasonable for total proceeds in the coming year to achieve 2014 levels."
Quantity & Quality
IPO activity on U.S. exchanges was up significantly in 2014 and capital markets executives identified multiple drivers for the increase in offerings. When asked to identify the most prominent factor behind the increase in IPOs, the bankers cite three chief factors - increased confidence in the U.S. economy (33%), continued low interest rates increasing investor demand for higher yielding assets (33%) and positive IPO performance encouraging more businesses to make offerings (21%). Smaller proportions mention increased investor cash flow into stock focused mutual funds (9%) and the JOBS Act encouraging emerging businesses to pursue offerings (5%).
The investment banking community does not believe that the extended period of strength the U.S. IPO market has experienced over the past two years has led to any decline in the quality of offerings. The vast majority of bankers believe the quality of recent offerings has either increased (27%) or stayed about the same (59%), versus just 14 percent who report a decrease in the quality of offerings. In a related finding from the study, a majority (58%) believe the valuations of recent IPOs are realistic and pricings have not been too aggressive.
The strength of the U.S. IPO market over the past two years has been the wide breadth of industries - led by the healthcare, biotech, technology, financial and energy sectors - represented among the offerings. In terms of how individual industries will fair in 2015, close to three quarters (73%) of those in the investment banking community are predicting an increase in offerings from the technology industry and better than two-thirds are forecasting an increase in IPOs in biotech (69%) and healthcare (68%). Given the breadth of industries that contributed to the robust growth in the 2014 U.S. IPO market, no other industry is predicted to achieve an increase in IPOs by a majority of the survey participants. The energy industry, a leading contributor to the 2014 IPO market, is the only sector that has a majority of bankers predicting a decrease in offerings in the coming year.
"The number of IPOs from the technology industry has been somewhat curtailed in recent years due to the wide availability of private financing in Silicon Valley. This has led to a pipeline of dozens of private tech companies already valued at more than $1 billion. Given the strength of the current market, these businesses may decide the time is right to finally pursue a public offering. The health care industry, and more specifically biotech, will remain a core source of offerings in 2015 as investors seek to identify businesses with breakthrough therapies," said Brian Eccleston, Partner in the Capital Markets Practice of BDO USA. "Given the significant drop in the price of oil and the expectation that these low prices will continue in the medium term, the capital markets community sees few IPOs coming from the energy sector as it struggles with reduced profits"
When asked to comment upon the greatest threat to a healthy U.S. IPO market in 2015, 40 percent of the I-bankers cite global political instability, while almost one-third focus on the Federal Reserve paring back monetary stimulus (31%). Financial instability in Europe (12%), the weakening Chinese economy (10%) and the threat of tax increases (7%) are identified as threats by smaller minorities of the participants.
U.S. vs. The World
The U.S. led all countries in IPO proceeds in 2014, generating more than one-third of total global proceeds. When asked the chief factor driving this trend, better than half of the capital markets community cite increased investor confidence in the U.S. economic recovery (53%), while more than a quarter (27%) identify increased investor cash flowing into stock-focused mutual funds. Chinese IPOs returning to U.S. exchanges (11%) and slow growth in China (10%) are the other factors mentioned by a smaller proportion of the bankers.
Moving forward, 45 percent of I-bankers believe U.S. exchanges will increase their share of global IPO proceeds during the coming year, although only 8 percent describe the increase as substantial. A slightly smaller number (40%) predict the U.S. cut of the global pie will remain about the same as 2014, while 15 percent anticipate the U.S. share declining in 2015.
More than half (52%) of capital markets executives believe the percentage of foreign-based IPOs on U.S. exchanges will increase in the coming year, though only 9 percent describe the increase as substantial. Almost a third (30%) expect that this percentage will be unchanged in 2015 and 18 percent predict a decrease in foreign-based offerings. A majority of the bankers (58%) cite Asia as the geographic location most likely to spawn foreign-based IPOs on U.S. exchanges in 2015. Europe (24%) and Latin America (13%) were other regions cited by sizable proportions of bankers.
In terms of which foreign exchanges will be most popular for IPOs in 2015, Shanghai (30%), Hong Kong (25%), and London (19%) were the main exchanges cited by the bankers.
These findings are from The 2015 BDO IPO Outlook survey which examines the opinions of 88 capital markets executives at leading investment banks regarding the market for initial public offerings in the United States in the coming year. The telephone survey, conducted within a scientifically-developed, pure random sample of the nation's leading investment banks, took place in December 2014.
Other major findings of The 2015 BDO IPO Outlook Survey:
- ROI. In 2015, the investment banking community is predicting one-day returns of 11 percent and overall returns of 12 percent for the average IPO. Each of these figures is below the level of 2014.
- PE and VC Will be Lead Sources of IPOs. Private equity (38%) and venture capital (32%) portfolios are the most often mentioned sources of IPOs in the coming year. Owner managed privately-held businesses (20%) and spinoffs and divestitures (11%) are the other sources identified by the bankers.
- Valued Attributes of Offerings. When asked what offering attribute will be most valued by the investment community in 2015, almost half (48%) of the bankers cite innovative businesses with rapid growth potential. Long-term growth potential (24%), stable cash flow (15%), profitability (9%), strength of industry vertical (4%) are cited by smaller proportions of participants.
BDO USA is a valued business advisor to businesses making a public securities offering. The firm works with a wide variety of clients, ranging from entrepreneurial businesses to multinational Fortune 500 corporations, on myriad accounting, tax and other financial issues.