Investors aren't the only market players avoiding equities this summer. Companies are, too. Initial public offerings in the finance sector have ground to a halt due to poor market conditions, and there's no telling when the frozen IPO pipeline will thaw.
Since July 8, when Fortune Bank shelved its $360 million IPO, a total of 11 filings in the finance sector have not gone to market, according to data from Renaissance Capital, a Greenwich, Connecticut, IPO research firm. Those 11 filings are just a fraction of the total 168 IPOs that have stalled and are waiting to be priced when market conditions improve.
"The market has been challenging, but there are a bunch of IPOs on file hoping to get done," said Renaissance Capital principal Kathleen Smith. "There are a whole lot of companies willing to get done, even if they're hard to get and they have to discount the price. They know what's happening. There are 168 IPOs in the pipeline. That's a lot. There's a whole lot of momentum built up for companies that want to come out, and they're going to come out at very attractive prices to get done."
IPOs a Buyer's Market
When IPOs start coming out again, it will likely be a buyer's market as investors pick and choose among the best deals. Based on the few IPOs that actually have gone to market over the last few months as the stock market performed poorly, growth companies will probably fare best.
"Perhaps some of the offerings on the calendar may come by the end of the quarter. Bankers may feel it's an appropriate time to price them now," said Richard Peterson, director of valuation and risk strategies at Standard & Poor's. "In a down market, investors are reluctant to buy them. In a rising market, potential buyers are more confident about the trajectory of equity prices going forward, and earnings expectations have not been reduced for the full year of 2010."
In the summer, the Greek debt market crisis put the equity and credit markets on edge while the housing market was in the early stages of recovery and both mortgage lenders and consumers were experiencing difficulties, Peterson noted. "One of the issues with financial IPOs is that commercial or community banks are still concerned about how they're going to make money," he said.
Green Dot, Envestnet See Best After-Market Trading
By number of deals, the Renaissance Capital data shows that the Finance sector came in second behind Technology, with 16 deals totaling $2.9 billion as of
September 9 and an average first day return of 8.1%. The average total return for the Finance sector is a disappointment at negative 0.1%. Similarly, the average IPO has returned 1.0% from its offer price so far in 2010.
Financial stocks "started out with a strong interest in them, but they haven't sustained interest beyond the first day of trading," Smith explained. "REITs are the lowest performers in the Finance sector. The best after-market trading has been in growth companies in the financial segment--Green Dot and Envestnet. They're not a typical yield play. CBOE has really disappointed a lot of investors because of derivatives regulation."
Since June, six financial companies have actually priced IPOs, including Green Dot, Envestnet, and CBOE Holdings. Green Dot, the leading provider of reloadable prepaid debit cards in the United States, priced its IPO at $36, above the $32-$35 range. But Envestnet's pricing came in at the low end of its range. (Also coming in low was Park Sterling Bank's IPO, at $6.50, below the range of $9-$11.) CBOE, the largest U.S. options exchange, raised $339 million by offering 11.7 million shares at $29, the high end of the $27-$29 range, but the stock has since slipped into $22 territory.
Meanwhile, Fortune Bank, a recently formed commercial bank led by former HSBC executives, postponed its $360 million IPO on July 15 because of poor market conditions.
Finance companies that have filed IPOs and now await pricing are netSpend, STAG Industrial, Walker & Dunlop, Gladstone Land Corporation, Summit Hotel Properties, Aveon Group, Richmond Honan Medical Properties, Imperial Holdings, ECM Realty Trust, Velocity Commercial, and FXCM.
Read an interview with Envestnet's Jud Bergman on his newly public company's plans from the archives of InvestmentAdvisor.com.