Big investors’ appetite for IPOs still strong

The initial-public-offerings market might have fallen from the headlines since last year’s humbling offering by Facebook Inc., but that hasn’t curbed the appetite of institutional investors.
While the global IPO market has shrunk considerably over the past few years, the demand among institutional investors, including mutual funds, has swelled.
“I think there’s a perception that institutional investors are no longer interested in IPOs, but they clearly are,” said Maria Pinelli, global vice chair of strategic growth markets at Ernst & Young LLP who studies the global IPO market.
In a survey of more than 300 institutional investors, Ms. Pinelli found that 82% had invested in an IPO during the previous 12 months.
That compares to just 12% that said they had invested in IPOs in 2010 and 2011.
“It is a very overwhelming finding,” she said. “This shows that there are interesting companies in the IPO pipeline, and institutions are investing in the growth stories.”
Globally, there were 203 IPOs last year, down from 339 in 2011 and 479 in 2010, according to Renaissance Capital LLC.
The United States, representing the world’s largest IPO market, contributed 128 IPOs last year, 125 in 2011 and 154 in 2010.
In terms of dollar volume, the global market totaled $99.6 billion last year, down from $138.9 billion in 2011 and $243.2 billion in 2010. U.S. IPO volume included $42.6 billion last year, $36.3 billion in 2011 and $38.9 billion in 2010.
While global IPO volume has slowed, the fact that the U.S. IPO market has stayed strong says a lot about the strength of the market, according to Josef Schuster, manager of the First Trust U.S. IPO Index Fund (FPX).
“The perception is that the IPO market has slowed down, but that’s wrong,” he said.
Mr. Schuster’s fund, which invests in large IPOs and spinoff companies, illustrates that IPO performance is alive and well.
The fund has gained 11.7% from the start of the year, which compares with 6.6% for the S&P 500.
The fund was up 30.5% last year, while the index gained 16%.
For a lot of retail investors, the idea of an IPO still dredges up memories of last May’s Facebook offering, which priced at $38 a share and after the second trading day has never closed above $33.50.
It is currently trading at around $27. Retail investors have lost an estimated $630 million on the stock since the company went public.
But that’s not the story institutional investors are focused on, according to Ms. Pinelli.
“Institutional investors want a compelling story, but they also want a proven track record,” she said. “In a down market, quality rises to the top in the IPO space.”
According to her research, the factors most likely to improve IPO market sentiment include a brighter corporate earnings outlook, stabilized macroeconomic conditions and stabilized equity markets.