IPO Boom Signals Markets Are Ready to Take a Few Risks Again

The increase in second-quarter initial public offerings is a sign that financial markets are more willing to put money into long-term growth, and that investors are more willing to take risks again for higher returns. IPO volume in the U.S. grew from 27 launches in the first quarter to 37 in the second quarter -- the largest number in any quarter since the financial crisis began. Additionally, the half-year total of 64 IPOs in 2010 already surpasses the total of 63 for all of 2009.

With the pace of new stock issues picking up and several highly anticipated IPOs in the pipeline for the second half of the year -- among them, audience ratings firm Nielsen, rental car service ZipCar, health-services organization HCA, retailer Toys R Us and insurer Liberty Mutual -- IPO tracking firm Renaissance Capital predicts that "2010 could rank among the top years in the last decade in terms of proceeds raised."

The IPO pipeline has grown from 80 filings in the first quarter to 113 in the second quarter, which indicates interest in IPOs is strong. Renaissance Capital reports that since the second quarter, another 37 companies have filed for IPOs, pushing the total to 150 filings for the year. By contrast, at this time in 2009, there were only 28 filings in the pipeline. So far in 2010, 75 IPOs have bought in proceeds of $11.8 billion. At this same time last year, there had been only 16 IPOs in the U.S. with proceeds of $2.8 billion.

"The resurgence of pipeline activity represents optimism about the growth of the economy and the markets," says Maria Pinelli, Americas Director, Strategic Growth Markets, Ernst & Young. "Renewed interest from foreign growth companies, including Chinese companies, also demonstrates the attractiveness of U.S. markets globally. These numbers are a great indicator."

In 2009, Investors Played It Safe

Such interest in the IPO markets shows that credit markets are more open to financing ventures that have growth potential over the next two to five years. In its second-quarter IPO Review, Renaissance Capital suggests that "there are numerous large private-equity and government-owned assets prepping for exits, and emerging markets are still chock full of growth enterprises in need of capital."

Ernst & Young, which tracks IPOs quarterly, also points out that other opportunities have emerged as the stock markets have recovered and investor appetite for risk has returned.

"In 2009, much of the IPO activity came from large companies and spinoffs, and investors showed interest in these safe, mature businesses," says Pinelli. "This quarter's activity represents a willingness for smaller companies to use the capital markets to stimulate growth. Meanwhile, the markets are openly returning to their willingness to invest in risk for potential growth and reward."

Since the financial crisis hit, it has been extremely difficult for smaller companies to get financing, but a higher number of smaller companies have been able to launch IPOs this year. Of the 113 companies in the pipeline at the end of the second quarter, 59 were seeking $100 million or less. This suggests that even smaller deals are being accepted under current economic conditions, something that wouldn't have happened last year.

While there will be more deals in the second half of 2010, they are not all guaranteed to be successful. Globally, IPOs posted an average return of 2% for the quarter, with only 47% closing the quarter above their offer price. But with issues like Tesla Motors (TSLA) motivating investors (it's up 23% since going public in June), the IPO market is sure to remain vibrant for the remainder of the year.