Initial public offerings hit decade-long highs in 2013, a trend that should continue in 2014, according to Renaissance Capital.
Coming off of their best year since 2000, U.S. IPOs should fare well in the new year, based on "a building backlog of IPOs and economic indicators continuing to show signs of improvement," according to the IPO investment advisor.
"We anticipate another dynamic year for the US IPO market in 2014," Renaissance wrote in its annual wrap-up report. "With positive investor sentiment, low volatility levels and improving economic conditions setting the stage for another strong year for U.S. stocks, we expect the US IPO market to remain healthy in 2014."
Although the visible pipeline shrank this year, from 117 companies seeking a collective $36 billion in 2012 to 85 companies seeking $23 billion in 2013, the active pipeline is strong heading into 2014, Renaissance said.
"The active pipeline, measured by companies that have filed an update within the last 90 days, remained steady (47 vs. 49 in 2012)," according to the report.
IPO activity in healthcare was driven by a biotech "boomlet," according to Renaissance. Biotech companies closed on 37 offerings, "the most in over a decade, after years on the sidelines," according to the report. And biotech IPOs averaged a 39% return, with only 9 ending the year below their issue price.
"Both issuance and proceeds dwarfed even pre-recession levels for the [biotech] sector and could have been higher if not for a string of 4th-quarter postponements. Buying by insiders, typically essential to completing biotech IPOs, occurred in less than half of deals (down from 91% in 2012), and, for those that did need it, accounted for only 24% of the deal on average (compared to 40% in 2012)," according to Renaissance. "Demand crested in the summer, when first-day returns climbed to an average of 30%. In June, for the first time since 2006, a biotech deal was priced above the range. Four more above-the-range pricings took place in the 3rd quarter, including one by Agios Pharmaceuticals, which had yet to begin clinical testing."
Overall returns in 2013 were 35%, with nearly ¾ of all IPOs ending the year above their issue price and 1st-day returns averaging 17%, according to the report.
"These statistics are significant given the pullback in pricing discounts: only 29% of the year’s deals priced below the initial range (compared to 40% in 2012)," Renaissance said. "Six IPOs more than doubled on the first day of trading in 2013, as many as in the previous seven years combined. On the other hand, 27% of this year’s IPOs had negative first-day returns. This bifurcation indicates that investors remained highly selective, even during a period of broad-based stock market gains."