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IPOs Expected to Have Strong Year as Stocks Recover

U.S. companies are expected to go public this year at the best pace in three years, as investors regain confidence in stocks and seek more risk.

Traders work on the floor of the New York Stock Exchange.
AP
Traders work on the floor of the New York Stock Exchange.

Among the first to test the waters will be TV ratings company Nielsen Holdings, while a big wild card for the market will be whether one of the young, fast-growing internet companies like LinkedIn or Groupon decide to go with an initial public offering (IPO).

A rebound from the two-year slump in the U.S. IPO market started last year and should accelerate, industry experts say. There are currently more than 130 companies in the pipeline, mostly U.S.-based, and at least twice as many are believed to be waiting in the wings.

“U.S. IPOs will step up in activity due to recent clarity on tax rates, the Federal Reserve's QE2 effort to push investors into the equity market and the prospects of a more business-friendly federal government,” says IPO research and management firm Renaissance Capital in a recent report.

The firm’s research director Paul Bard told CNBC that the IPO market will continue to take its cue from broader equity markets, but he sees the environment as very positive.

“Companies are feeling better about their business and growth prospects; money is coming to equity funds, and investors are making money in IPOs not only on the first day, but after the first day as well,” he said.

Bard sees the growing activity on private exchanges as an indication of a strong desire among institutional investors for young, U.S. growth companies.

“This means should they decide to move forward with IPOs, there should be strong demand from the buy side,” he said.

The biggest surprise of the year may come from the swollen shadow IPO pipeline that includes some high-profile names.

Peter Falvey, a managing director at Morgan Keegan, says the real wild card in 2011 will be hyper-growth Internet companies currently on sidelines like Facebook, LinkedIn, Groupon, Zynga or Twitter.

”If one of them files, this will bring attention to the IPO market unlike anything we have seen since at least Google went public in 2004,” Falvey said.

Just this week, reports surfaced that Goldman Sachs has offered its wealthy private clients an opportunity to invest in Facebook. The reported investment raised Facebook’s valuation to a jaw-dropping $50 billion.

According to Falvey, this gives Facebook the luxury of putting off an IPO for some time. In fact, the latest reports say the company will go public or disclose financial information no earlier than April 2012.

“Their early investors aren’t clamoring for liquidity, and they won’t want to disclose their numbers to the public through filings until necessary,” Falvey said. Staying private also makes it easier for Facebook to further experiment with its revenue model, he adds.

This year, the U.S. IPO market will see more traditional growth issuers, with U.S. small cap tech and consumer companies picking up activity, expects Bard of Renaissance Capital. The healthcare sector is also anticipated to stage a comeback, after being notably absent last year due to uncertainties surrounding policy reform.

Private-equity IPOs, which struggled in 2010, should increase in both number and volume, according to Bard.

“We expect several large $1billion-plus private equity IPOs," he said. However, investors will continue to push for lower prices.

One of the first blockbuster offerings of the year may be Nielsen Holdings. The company could raise $2 billion, becoming the largest PE-backed public offering in a decade. Bard says keep an eye on HCA, the largest private hospital operator in the country. This IPO could set a record, raising close to $5 billion. Other notable IPOs currently in the pipeline: Toys “R” Us, Kinder Morgan, and Skype.

Chinese IPOs: A Mixed Bag?

Bard also expects venture capital portfolios and investors’ thirst for growth to draw out more IPOs from the technology, Internet, and cleantech sectors.

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Karin Slade | The Image Bank | Getty Images

The quality of IPOs is improving as well. “We see a lot more diligence around the company’s readiness to go public, scrutiny of its books and management,” says Neil Dhar, IPO Services Partner with PwC Transaction Services. “There are no more shortcuts.”

The increase in issuance from U.S.-based IPOs is expected to take a bite from the market share of US-listed Chinese IPOs this year. Accounting for 27 percent of issues in 2010, a record number of China-based businesses raised capital in the United States. This year, the Chinese issuance volume should moderate, according to the outlook from Renaissance Capital.

Activity in China-based IPOs should remain on par with 2010, but analysts say the initial exuberance has subsided. Negative publicity around questionable accounting practicesbrought some skepticism to the market. Bard says investors now are more discerning and no longer act solely on the prospects of extremely high growth offered by these companies.

“We now have a track record of performance that investors can look at,” says Bard. “The indication is that they are already being very selective and discriminating between Chinese IPOs with differing risk profiles.”

Peter Falvey of Morgan Keegan agrees: “China IPOs have been something of a mixed bag, and the perception of Chinese IPOs as intrinsically more interesting than U.S. ones has been waning.” He expects more scrutiny will be placed on individual issuers.

Even with the rebound in the domestic IPO market, the United States will nevertheless continue to lose its position on the global stage to Asia. Renaissance Capital forecasts that this year’s U.S. IPO market proceeds of about $50 billion will account only for 15 percent to 25 percent of the global market. That is a far cry from the 40 percent to 55 percent market share it held between 1999 and 2004.

Analysts cite structural issues and a restrictive regulatory environment in the United States as one of the major reasons for the dwindling market share.

“It is becoming more and more viable for a non-U.S. company to raise significant equity capital in an initial public offering and listing in financial markets outside of the United States,” says Joshua Ford Bonnie, a lawyer and partner at Simpson Thacher & Bartlett.

Bonnie is not surprised that some non-U.S. companies that might have previously chosen to go public here now choose other markets.

“The Sarbanes-Oxley Act and now the Dodd-Frank Act, as well as continued expansion of disclosure and other regulatory requirements, continue to increase the cost and burdens of being a public company in the U.S. for many companies,” he said.

Renaissance Capital notes that structural and regulatory issues particularly hamper small cap IPOs. “We are hopeful that policymakers will make adjustments to create a more friendly, supportive and liquid environment for small cap issuers, without compromising standards of quality.”

That said, analysts say the U.S. market remains an attractive venue for many IPOs due to its regulatory standards, deep liquidity, broad investor base, as well as its undeniable “cache.”