Despite market volatility and a shaky economic recovery, the global initial public offering (IPO) market for 2010 is on track to hit a record high – and 2011 is poised to continue the hot streak.
A study by accounting group Ernst & Young yesterday (Wednesday) showed that funds raised through global IPOs are expected to surpass $300 billion in 2010, topping the 2007 record of $295 billion. IPOs in the first 11 months of the year collected $255.3 billion in 1,199 deals.
"New IPO filings continue to increase around the world and a large backlog has built up as companies await greater macroeconomic stability," said Gregory Ericksen, Ernst & Young's global vice chair for strategic growth markets. "We expect the current IPO momentum to continue its upward trend in 2011."
2010's fourth quarter is expected to reach the highest quarterly IPO value on record, beating 2007's final quarter of $104.8 billion. There have already been 294 deals raising $102.8 billion in the final three months of the year.
Europe's IPO market has grown by over 500% from last year with 223 companies raising funds. In the United Kingdom alone, 50 companies listed on the London Stock Exchange in the first 11 months of this year, up from last year's total of seven.
Europe would have seen even more companies float this year if not for the market uncertainty that arose from the debt crisis and subsequent austerity measures. The year's uneven economy caused businesses like Travelport and Merlin Entertainments Group to shelve their IPO plans.
While others proceeded with IPOs, their offerings underperformed expectations. Europe's biggest IPO this year, Italy's power giant Enel Green Power, raised about $3.18 billion (2.4 billion euros), falling short of its $3.4 billion goal.
This year's U.S. IPO success story is General Motors Co. (NYSE: GM), which raised $20.1 billion last month to become the biggest IPO in U.S. history. The GM offering boosted the U.S. IPO market past last year's $21.9 billion total deal value after a slow start to 2010.
"The positives that we've seen in the fourth quarter in the U.S. will hopefully spill over to Europe," Julie Teigland, head of strategic growth markets Europe, Middle East, India and Africa at Ernst & Young, told CNBC.
Surging Emerging Markets Draw Investors to IPOs
The strong global IPO market this year was mostly fueled by rapid growth in Asia, especially in the financial and insurance sector. The Asian market accounted for 64% of total IPO funds raised this year. That's up from a mere 12% of the market the region held in 1999.
"Benefiting from relatively low interest rates in developed markets and abundant liquidity, global investors in the last 11 months have been avidly seeking exposure to the growth in Asia and other emerging markets," said Ernst & Young's Ericksen.
China so far this year has accounted for more than 45% of the global IPO total, as investors flocked to promising high growth companies such as the Agricultural Bank of China Ltd. The $22.1 billion offering made it the world's largest IPO ever, making up 9% of this year's global IPO total.
India celebrated its biggest IPO ever this year with the world's largest coal producer Coal India Ltd. collecting $3.5 billion in October.
Money Morning Chief Investment Strategist Keith Fitz-Gerald said Asia's growth has made it the "new king of the global IPO market," taking the crown from Wall Street.
"Unprecedented demand for IPOs in Asia has reduced the U.S. share of the global IPO market to an all-time low," said Fitz-Gerald. "China topped the field by raising the most money of any single country. This says a lot about the respective outlooks for the two countries' economies. And it also tells us a great deal about how we should be investing our money."
Fitz-Gerald credits the U.S. Federal Reserve's decision to keep interest rates low as a catalyst for emerging market investing that is pouring into the IPO market.
"My take is that we're seeing our own zero-interest-rate policies here drive capital there," said Fitz-Gerald. "These investors are willing to brave the higher presumed risks of other markets in return for a better return on their money."
Asia's IPO Surge to Continue in 2011
Continued emerging market growth in 2011 will keep Asia as the global IPO market leader as developed economies in the Europe and United States struggle to regain economic footing.
"The IPO market reflects the twin-track global economy with Europe and the U.S. trailing Asia, where GDP is racing ahead," said David Wilkinson, U.K. IPO leader at Ernst & Young. "I think next year will be a similar story, with perhaps more action from Latin America, especially Brazil. South America has recovered less quickly from the recession than China and India, but is now rebounding strongly."
While Asia will continue to boost next year's IPO market, analysts express mixed sentiment on Europe's expected performance.
David Wilkinson, U.K. IPO leader at Ernst & Young, said there are "a pipeline of companies waiting to list their shares, but if investors demand knockdown prices, firms may conclude now is not the time to sell."
"There is a pipeline of IPOs out there, there is no question – we are working on them," said Marco Illy, the head of Swiss investment banking.
Illy expects banks to raise lending costs to borrowers as new rules require higher capital requirements, and the more expensive loans will fuel IPO growth.
With its economies continuing to expand in 2011, analysts expect Asia to maintain high IPO issues into the New Year.
"It's amazing that Asian markets took over 66% of the transactions for 2010 up until November. We don't see any change for that in 2011," said Ernst & Young's Teigland. "Continue to bet on Asia. The growth markets there are really coming out strong."
Fitz-Gerald urged investors to consider that Asia's growth rate is five to 10 times higher than the United States – making IPOs in the Asian market desirable investment opportunities.
"The bottom line is that Asian markets are where the growth is and will be which is why the amount of capital headed that direction is accelerating," said Fitz-Gerald. "Make sure you don't miss it: If you don't get in on the ground floor now, chances are you'll have to risk a climb through an upstairs window later."
News and Related Story Links:
- Money Morning:
Sorry Wall Street – Asia is the New King of the Global IPO Market
- Money Morning:
Asia Forecast: High Growth Rates Will Create Top Profit Opportunities For 2011
Despite Volatility, 2010 Set to Be Record IPO Year
- Renaissance Capital:
2009 Global IPO Market Review and 2010 Outlook
Enel raises less than hoped in green IPO
- Event Magazine:
Merlin Entertainments cancels mega-IPO as market remains tough
- The Economist:
Powering the tiger
Global IPO Proceeds to Reach Record High in 2010
- The Guardian:
Asian boom fuels record year for floats
Travelport IPO pull strikes blow to nascent market
- Money Morning:
Stock Market Analysts and Insiders Wave Caution Flags After $20 Billion GM IPO
- The Wall Street Journal:
Credit Suisse Exec: Signs Swiss IPO Market Stirring