IPO market stirs from ’08 slumber

The initial public offering market appears to be awakening from its slumber.

There were three public stock offerings this month, sparking renewed interest in the IPO market, which has been in hibernation since August. The latest release, Rosetta Stone Inc., has seen its stock price rise a roaring 44%.

Rosetta Stone is an Arlington, Va.-based developer of language-learning software.

The three IPOs during the first two weeks of April, which compare with two during the first three months of 2009 and just one during the fourth quarter of 2008, are being interpreted by some analysts as a significant indicator of market confidence at the institutional-investor level.

“Signs of life for the IPO market are promising,” said Bill Buhr, an equity analyst at Morningstar Inc. in Chicago.

He added that the volume of public stock offerings in May and June will be a better indicator of the health of the IPO market.

“We are a long ways from normal market functionality, but there is a lot of institutional money on the sidelines,” Mr. Buhr said. “This summer will be very interesting.”

Most industry analysts think that those companies that can successfully go public in times of extreme economic turmoil and uncertainty represent tremendous investment opportunities.

“The cream of the crop always comes out first in these kinds of markets, and if those IPOs are successful and well-received, we’ll start to see some second- and third-tier companies go public,” said John Fitzgibbon, founder of IPOScoop.com in Edison, N.J.

After such a sustained drought in the IPO space, Mr. Buhr said, more companies that have been waiting for the right time to offer shares in the equity markets are likely to interpret the success of recent IPOs as a green light.

“At the end of the day, the success of an IPO like Rosetta’s could lead to some rush-through offerings now,” he added. “Initially, we’re going to see offerings from the more defensive industries such as health care, education and consumer staples.”

In addition to Rosetta Stone, San Diego-based distance higher-education company Bridgepoint Education Inc. went public April 15, and April 2, Beijing-based video game maker Changyou.com Ltd. went public. Bridgepoint shares are essentially flat since the IPO, but Changyou.com shares are up 62% from its offering.

Phoenix-based Grand Canyon Education Inc., which provides online-education services, went public Nov. 18 as the only public offering during the fourth quarter of 2008.

Its stock is up 25% from the initial offering, representing a significant sign of strength, particularly since it went public well before the stock market’s March 9 low.

Of the six IPOs since August, all are trading above their initial offering price.

From September through April 22, the Standard & Poor’s 500 stock index declined by 34%.

Although the proliferation of IPOs so far this year stands in stark contrast to the late 1990s or the 2004-07 period, when companies went public at a rate of about 20 a month, the current environment is seen as a bright spot in the context of a brutal global economy.

“The new normal won’t look like the normal we’ve known for the past 15 years,” said Tim Walker, an analyst with Hoover’s Inc. in Austin, Texas. “We’ve had a little break in the weather, but I don’t think the seasons have changed yet.”

The fact that the IPO market is now a mere shadow of recent boom periods is all the more reason to get on board, according to Linda Killian, a principal at Renaissance Capital LLC in Greenwich, Conn.

“What’s playing out now is what played out during the same kind of low-IPO period in the 1970s,” she said. “When the IPO market re-turned, the performance of the early public offerings did very well.”

Renaissance Capital specializes in IPO market research and in 1998 launched the IPO Plus Aftermarket Fund, a mutual fund to tap into public stock offerings. After growing to $200 million in 1999 and despite outperforming the broad equity markets on a relative basis, the fund’s assets have dropped to $9 million.

“We believe in the product, and we believe investors will eventually come back to the market,” said Ms. Killian, who manages the fund.

The force of pure economics suggests that the IPO market can’t stay down forever.

Historically, venture capitalists have been responsible for more than 50% of all IPOs, and the VC industry is champing at the bit to start moving private companies out of its portfolios.

“The venture capital funds want and need liquidity, which is why you should see the level of IPO filings increase late summer through early fall,” said Mark Sunderhuse, a portfolio manager at Red Rocks Capital LLC, a Golden, Colo.-based alternative-asset-management firm with $170 million under management.

Three companies registered for IPOs during the first quarter, according to Hoover’s, compared with 10 during the same time last year.

“The IPO drought has wreaked havoc on the VC market,” said Emily Mendell, vice president of strategic affairs at the National Venture Capital Association in Arlington. She estimates that there are 24 VC-backed companies in registration waiting to go public, which is about half the historical average.

E-mail Jeff Benjamin at [email protected].