By Lynn Cowan
The end of the summer was a mixed bag for the U.S. IPO market, with deal flow improving but new stock pricing becoming tougher.
The pace of initial public offerings picked up in July and August after a slow June, when only four deals made it to market in the wake of Facebook Inc.'s (FB) disappointing performance in late May. July and August racked up 17 IPOs, the same amount as in 2011. Among the late-summer deals that managed to debut were soccer club Manchester United PLC (MANU), teen retailer Five Below Inc. (FIVE), and travel-website company Kayak Software Corp. (KYAK). No additional IPOs are expected for the remainder of August, thanks to the U.S. market's traditional summer holiday hiatus that lasts until mid-September.
While the pace of deals was improved from June, pricing a deal within the expected range became increasingly difficult as the summer drew to a close. Of the last 10 IPOs to price, eight sold shares below their ranges. Though major market indexes have been trending higher during that period, and volatility remains low, there was one factor in particular weighing on prices: Large institutional investors, such as equity mutual funds, have been watching investors withdraw more cash. According to Investment Company Institute estimates, outflows began to rise beginning the week ended July 25, when nearly $3 billion exited; in the week ended Aug. 1, outflows rose even higher, to $6.9 billion.
"Fund flows act like the oxygen in the IPO market. As such, the [institutional buyers] have less propensity to invest in unseasoned companies and tend to stick with more-seasoned companies they know" when outflows increase, said Frank Maturo, vice chairman for equity capital markets at Bank of America Merrill Lynch.
After taking a hit on price, however, most companies' shares were able to trade higher on their debuts, setting a positive tone for investors. Though the best performances came earlier in July, when Five Below priced above a raised range and still gained 55.9% on its first day, the deals that cut their prices toward the end of July and into August managed to rise between 1% and 19.1%.
"Over the last few weeks, the IPO market has shown mixed pricing dynamics but stronger aftermarket trading results. There's been real breadth to the calendar, with every major sector represented--both are a good sign of a return to normalcy," said Paul Wright, managing director in equity syndicate-Americas at J.P. Morgan Chase & Co.
Write to Lynn Cowan at [email protected]