Capital Markets Executives at Leading Investment Banks Predict Slow Growth in U.S. IPO Activity in 2013 According to BDO USA, LLP

According to a new study by BDO USA, LLP, one of the nation’s leading accounting and consulting organizations, capital markets executives at leading investment banks are projecting measured growth in initial public offerings (IPOs) on U.S. exchanges in 2013. Exactly half predict an increase in U.S. IPOs in the coming year, although only 8 percent describe the increase as substantial, while almost one-third (31%) forecast activity as flat compared with 2012. Just 18 percent expect a decrease in offerings on domestic exchanges. Overall, bankers predict a 6 percent increase in the number of U.S. IPOs in 2013. They anticipate these offerings will average $250 million, which projects to $34 billion in total IPO proceeds on U.S. exchanges.

“In 2012, the number of U.S. IPOs was relatively flat with activity in 2011, but total proceeds raised were the second most in the past ten years, trailing only the pre-crisis high of 2007. However, more than a third of 2012 proceeds were attributable to the Facebook IPO and, absent that offering, proceeds would have been the lowest since the height of the financial crisis in 2009,” said Brian Eccleston, a Partner in the Capital Markets Practice of BDO USA. “If you remove Facebook from 2012 figures, the bankers’ projections for the coming year represent an approximate 28 percent increase in proceeds.”

Absent the Facebook offering, the size of the average IPO in 2012 was considerably smaller than 2011 and capital markets executives identified several contributing factors for this trend. The most frequently cited factors were valuation pressures that forced offering businesses to cut prices (47%), smaller businesses pursuing offerings (31%) and companies offering a smaller percentage of the business in the deal (13%).

IPO Threats

When asked to identify the greatest threat to a healthy U.S. IPO market in 2013, more than a third (37%) of capital markets executives cite the threat of tax increases and government spending cuts and a similar proportion (34%) highlight global political and financial instability. High unemployment (11%), constrained bank lending (10%) and competition from foreign exchanges (4%) are identified as threats by small minorities of the participants.

Industries

In terms of how individual industries will fair in 2013, approximately two-thirds of the investment banking community are predicting a continued increase in offerings in the healthcare (69%), technology (67%), biotech (67%) and energy (65%) verticals. A lesser majority (54%) forecast a jump in real estate offerings. No other industry is predicted to achieve an increase in IPOs by a majority of the survey participants. The healthcare and real estate verticals experienced the biggest jump in confidence (+19%) when comparing the 2013 and 2012 IPO forecasts by industry. (See chart below.)

Industry			% Projected 2012 Increase		% Projecting 2013 Increase
Healthcare			50%		69%
Technology			73%		67%
Biotech			59%		67%
Energy/Natural Resources			72%		65%
Real Estate			35%		54%
Industrial/Manufacturing			27%		33%
Consumer/Retail			23%		30%
Media/Telecom			39%		29%
Financial			16%		26%

(Proportions of Capital Markets Executives at leading Investment banks expecting U.S. IPO activity to increase in 2013 in specific industries versus the percentage from 2012 survey.)

U.S. vs. The World

The U.S. led all countries in IPO proceeds in 2012, generating more than 40 percent of global proceeds. Even without the Facebook IPO, U.S. exchanges would have led all other countries comfortably. When asked the chief factor driving this trend, the capital markets community identified an anticipated improvement in the U.S. economy (33%), the European debt crisis (33%) and slowing growth in China (23%).

Moving forward, approximately one-quarter (24%) of I-bankers see U.S. exchanges continuing to increase their percentage of global IPO proceeds during the coming year. However an even larger proportion (44%) believe the U.S. cut of the global pie will remain about the same as 2012, while approximately one-third (32%) anticipate the U.S. share declining in 2013.

"While deal activity in the U.S. was sporadic throughout the year, it compared very favorably to foreign exchanges. Slow growth in China severely reduced government-backed IPOs on the Hong Kong and Shanghai exchanges, while European exchanges remain captive to the continent's sovereign debt crisis," said Lee Graul, a Partner in the Capital Markets Practice of BDO USA. "Capital markets executives are anticipating further improvements to the U.S. economy in 2013, and that will be the key to U.S. exchanges maintaining a dominant position in terms of total global proceeds."

Approximately one-third (32%) of capital markets executives believe the percentage of foreign-based IPOs on U.S. exchanges will increase in the coming year, while a slightly larger proportion (38%) expect that this percentage will remain flat with 2012. Twenty-nine percent predict a decrease in foreign-based offerings.

The bankers overwhelmingly (61%) cite Asia as the geographic location most likely to spawn foreign-based IPOs on U.S. exchanges in 2013. Latin America (15%), Europe (10%), Eastern Europe/Russia (6%), Middle East (3%) and Africa (2%) were other regions cited.

In terms of IPOs taking place on foreign exchanges, about one-third (32%) of investment bankers believe Hong Kong will be the most popular in 2013. Shanghai (19%) and London (17%) are the only other exchanges receiving double digit support.

These are just a few of the findings of The 2013 BDO IPO Outlook survey which examines the opinions of 100 capital markets executives at leading investment banks regarding the market for initial public offerings in the United States in the coming year. The telephone survey was conducted in December 2012.

Other major findings of The 2013 BDO IPO Outlook Survey:

ROI. In 2012, the average IPO delivered a healthy return on investment, a major improvement from the negative average return of 2011. In 2013, the investment banking community is predicting one-day returns of 13 percent and overall returns of 12 percent for the average IPO.

PE Remains Lead Source of IPOs. For the fourth consecutive year, private equity portfolios (41%) are the most often predicted source for IPOs in the coming year. Venture capital portfolios (24%), owner managed privately-held businesses (16%) and spinoffs and divestitures (15%) are the other sources identified by the bankers.

Valued Offering Attributes. When asked what offering attributes will be most valued by the investment community in 2013, 38 percent cite long-term growth potential and approximately one-third (32%) say stable cash flow. Profitability (13%) and strength of industry vertical (12%) are cited by smaller proportions of participants.

Bulge Bracket Observations. Capital markets executives at the very largest banks or “bulge bracket” firms mirror the responses of the total capital markets community on most topics. However, they were much more likely (61% vs. 37% overall) to view tax increases/spending cuts as the primary threat to the U.S. IPO market in 2013 and twice as likely (65% vs. 32%) to predict an increase in foreign-based offerings on U.S. exchanges this year. They were also more bullish (67% vs. 54%) on an increase in real estate IPOs in 2013.

The BDO IPO Outlook Survey is a national telephone survey conducted by Market Measurement, Inc. on behalf of BDO USA. Executive interviewers spoke directly to capital markets executives, using a telephone survey conducted within a scientifically-developed, pure random sample of the nation's leading investment banks.

BDO USA is a valued business advisor to businesses making a public securities offering. The firm works with a wide variety of clients, ranging from multinational Fortune 500 corporations to more entrepreneurial businesses, on a myriad of accounting, tax and other financial issues.

About BDO USA

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