The recession is over, at least for companies which want to raise money through IPOs. There have already been a large number of initial public offerings this year despite uneven markets. That may be because so much institutional money remains in cash to guard against a steep drop in the market. Most IPOs are a small risk for large investment pools which hold tens if not hundreds of billions of dollars in cash or short-term securities.

Investment banks sense the hunger for new companies which are about to come to the public markets. At least 161 firms plan IPOs that will total about $56 billion according to Renaissance Capital.

“Private Equity firms control 39 of these pipeline companies, which represent 30% of proposed proceeds and feature big names such as HCA ($4.6 billion), Nielsen ($2 billion), Toys “R” Us ($800 million), AMC Entertainment ($450 million) and Booz Allen Hamilton ($300 million),” the data shows. PE operation have had to sit on their investment since the recession began in 2007, and the market collapses of late 2008 and early 2009 must have made them despair that they would recoup their investments at all.

And there are other huge companies which want to move into the public markets, led by GM which will attempt to get taxpayers back some of the $50 billion that they put into the company. Part of that has been repaid as the No.1 US car company reduced  its debt.

One of the brightest pieces of news for the companies which plan IPOs is that their investment bankers have begun to put values on their firms which are more reasonable. From 2003 to 2007, it was not unusual for an IPO to have a 10% or 15% jump in the first day that it traded. The may be good for early investors. The companies, however, lose  money that they would have had if their deals had been priced closer to what the market perceived as their full value.  So far in 2010, the first day improvement in share price over offering prices has been closer to 5%.

The Renaissance Capital research tells something more and it should be a caution to IPO investors. One-year return on initial public offerings has been flat to slightly down so far in 2010. The returns were also down in 2007 and 2008, which would make sense based on when the overall market dropped. Returns from 2009 IPOs have been very modest. Investors have to go back to the 2003 to 2006 period to find a time when one-year returns on IPOs were consistently good.

Private equity firms and other investors that want to cash in their investments this year will probably be able to do so if the stock market and the appetite of capital funds  stays even moderately good. The people left holding the bag, if there is a bag to be held, will be the longer term investors who have to risk a potential downturn in the market next year or, more simply, poor financial results from the companies that do get public

Douglas A. McIntyre

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