The market for initial public offerings, all but dead since 2007, is slowly coming back to life. But don't expect it to dance for at least another year. "We're starting to see early signs of revival," says Paul Bard, vice president of Renaissance Capital. "But the floodgates aren't going to open any time soon."
While there were 272 IPOs in 2007, there were a paltry 43 in 2008, an 83% decline. And through August only about two dozen IPOs had launched, with the final 2009 tally expected to equal 2008's dismal number.
So why the optimism? There has been a sharp uptick in companies filing IPO registrations with the Securities and Exchange Commission. As of September, there were 67 companies in the active IPO pipeline, according to Renaissance Capital, up from 29 in March.
Private companies need several months to fulfill SEC requirements once they register, so many of those pre-IPO entities won't debut until next year. Under-the-radar activity indicates more may follow their lead. "Over the last six months, a lot of companies have told us that they want to make the transition to going public," says Jackie Kelley, Americas IPO leader for Ernst & Young. The number of companies that withdrew their filings or postponed their IPOs — which rose 62%, to 120, last year — has also decreased, according to Kelley.
How energetically the IPO market opens up will depend largely on stable equity markets, along with an improved economy and growing consumer confidence. In a survey of 37 IPO attorneys, about half expected the IPO market to be "slightly stronger" in 2010. "I'd characterize their mood as 'cautious optimism,'" says Richard J. Wolff, managing partner of North America for Kreab Gavin Anderson Worldwide, the communications consultancy that conducted the survey. Fifty-four percent predicted that it could take as long as two years for IPOs to return to their "normal" rate, defined as 5 to 10 deals a month.
Jay Ritter, a professor of finance at the University of Florida, says that the next round of IPOs will consist mainly of profitable, mature companies with market caps of at least $100 million and backers that need liquidity — not ambitious start-ups striving to build the next Google. "Investors need to regain their appetite for risk," says Bard. "Then we'll begin to see the exciting growth companies launch."