IPO Market Shrugs Off a Volatile Start to the Year

By Timothy J. Keating – Volatility is the arch-enemy of the new issue market: There is typically a strong inverse relationship between volatility and the number of IPO pricings.

And 2014 thus far, compared to 2013, has been a volatile year. So we thought it would be timely to check in on the IPO market to see how it’s doing. Answer: quite well, thank you very much.

Let’s set the stage with some numbers.

IPO market expansion has historically taken place in modest volatility environments, where the CBOE Volatility Index (or “VIX Index”) has been in the range of 10 to 20. By contrast, there are typically strong positive relationships between both recent IPO performance and equity market trends and the number of IPO pricings.

The average daily VIX Index closing value for all of 2013 was 14.2, and the 10-year average (2003-13) was 20.3. As of December 31, 2013, the VIX Index closed at 13.7, with a high and low during 2013 of 20.5 and 11.3, respectively. (For historical perspective, the VIX set an all-time high of 80.9 on November 20, 2008—in the heat of the financial crisis.)

On Monday, February 3, 2014, the VIX closed at a 13-month high of 21.4.

Of course, the level of the VIX is an abstraction to many, including market professionals. Another common way of viewing volatility is through the lens of triple digit point swings in the Dow Jones Industrial Average. In 25 out of the 26 trading days in 2014 (through February 7th), the Dow has had intra-day moves of at least 100 points. Certainly volatile by that measure, although with an increasing denominator a 100 point swing isn’t nearly as dramatic in percentage terms as say 25 years ago.

And with all this volatility, the IPO market is…off to a blockbuster start. (Note: Except where noted, all IPO data in this article are sourced from Renaissance Capital and based on their calculation methodology.)

Consider:

• There have been 27 IPOs priced year-to-date, a 59% increase from this time last year.
• The total gross proceeds raised in IPOs have been $6.2 billion, a 17% increase from this time last year.
• There have been 33 IPO filings year-to-date, a 230% increase from this time last year.
• The average IPO has returned 18% year-to-date (from its offer price). By contrast, the year-to-date return on the S&P 500 is -2.8%.
• And one IPO—Dicerna Pharmaceuticals (DRNA)—had a first day pop of 207%. The stock has since dropped to a point where it is only up 136% year-to-date.

2013 is hardly a soft year for comparison. In fact, by almost every measure it was the best year for IPOs since 2000.

Investment banking soothsayers on Wall Street tell companies that are planning to go public that IPO windows are temporary and fleeting. They are dead wrong.

We published a myth-busting white paper last year (“IPO Window: Open 79% of the Time”) that empirically demonstrated, and contrary to conventional wisdom, that the IPO market is in fact systemically open most of the time. The robust start to the IPO market in 2014 is just another data point dispelling this Wall Street shibboleth.

The explanation for the strength of the IPO market is a simple, one word answer: Growth.

Large public companies are struggling to grow their top lines. In a slow growth economy with full stock market valuations and no competition from fixed income, public investors are—and almost assuredly always will be—willing to pay a premium for the 20-30%+ expected revenue growth that is typical of many venture capital-backed technology companies that have recently gone public.

And lest you think that somehow the early start of the year has been an aberration, there are nine companies hoping to price IPOs in the upcoming week. Let the good times roll…in spite of volatility.

Timothy J. Keating is the CEO of Keating Capital, Inc. (Nasdaq: KIPO), a publicly-traded closed-end fund that specializes in making pre-IPO investments in emerging growth companies that are committed to and capable of becoming public. Keating Investments, LLC is an SEC-registered investment adviser that is the external investment adviser to Keating Capital. Mr. Keating can be reached via email at tk@keatinginvestments.com.

The opinions and observations expressed herein are solely those of Timothy J. Keating and are intended to provide insights on the IPO market at large and at the current time. None of these opinions and observations should be construed as relating to any specific portfolio company held by Keating Capital (including the future IPO timing or plans of any such portfolio companies). This article is not intended to be a solicitation to purchase or sell any security (including Keating Capital). Neither Timothy J. Keating, Keating Capital nor Keating Investments, currently own, or have plans to purchase, the shares
of any company referenced herein.