THE NEW IPOS AND A CHANGING MARKET

New IPOs and a Changing Market
By: scutler
File Under: Listed Companies
From Scott Cutler: Everybody was watching this week to see if the IPO market could get some legs again. The successful debuts of Bridgepoint Education and Rosetta Stone on NYSE Euronext effectively doubled the number of IPOs we have seen in the market this year and will help to lay a foundation for a stronger market that is really important for our economy.
These two events highlighted the changes in and importance of investors, traders, pricing and the effects of IPOs on the overall economy. Here are my observations on what we learned. From Scott Cutler: Everybody was watching this week to see if the IPO market could get some legs again. The successful debuts of Bridgepoint Education and Rosetta Stone on NYSE Euronext effectively doubled the number of IPOs we have seen in the market this year and will help to lay a foundation for a stronger market that is really important for our economy.
These two events highlighted the changes in and importance of investors, traders, pricing and the effects of IPOs on the overall economy. Here are my observations on what we learned.
IPO investors are looking for a solid investment thesis built upon three prerequisite characteristics: participation in a growing industry, business execution and market leadership. Sounds simple, but the number of companies meeting all three are rare--so don't expect the floodgates to open all too soon. I do think others will follow in the coming months, and they will be able to thank these two pioneers for helping to lead the way. These transactions were also particularly important in shaping sentiment around the IPO asset class itself. Investors making money on IPOs starts the flywheel, and momentum is able to build on itself.
The management teams and bankers involved in the recent deals told us that the buyside players are changing. Many of the hedge funds and fast money players are gone, heralding a return of the long-term investor. This is important for the newly public company because it gives them the ability to create a better shareholder base aligned with their strategic objectives.
Pricing and valuation are obviously critical to the success of an IPO. Both deals this week seemed to price well relative to their public comps. In the past, this has been a major problem in the industry as management teams, boards, and investors pushed to get the highest valuation and the last dollar out of pricing. It set up an environment where two-thirds of the IPOs missed expectations the first or second quarter after listing. My advice to any company on valuation is to remember two things: First the IPO is not a sale of the company and Second, you are an unproven private company with higher risk--acknowledge that and prove the market wrong. The year-over-year valuation comparisons are getting easier so valuation may prove to be less of an obstacle going forward.
My last point is something we often forget to think about. The IPO is an important job engine for our economy. These two companies employ about 2,000 employees. Bridgepoint didn't exist five years ago. Rosetta Stone had 10mm in revenue five years ago. Both companies create jobs, provide for families and create wealth. We need the IPO market to work in our economy--an economy, if I remember, that was established on entrepreneurship and innovation.
So, kudos to these two for setting the stage. I, for one, feel more positive today than I did last week and who wouldn't want a change in sentiment after the winter we have just barely lived through?From Scott Cutler: Everybody was watching this week to see if the IPO market could get some legs again. The successful debuts of Bridgepoint Education and Rosetta Stone on NYSE Euronext effectively doubled the number of IPOs we have seen in the market this year and will help to lay a foundation for a stronger market that is really important for our economy.
These two events highlighted the changes in and importance of investors, traders, pricing and the effects of IPOs on the overall economy. Here are my observations on what we learned.
IPO investors are looking for a solid investment thesis built upon three prerequisite characteristics: participation in a growing industry, business execution and market leadership. Sounds simple, but the number of companies meeting all three are rare--so don't expect the floodgates to open all too soon. I do think others will follow in the coming months, and they will be able to thank these two pioneers for helping to lead the way. These transactions were also particularly important in shaping sentiment around the IPO asset class itself. Investors making money on IPOs starts the flywheel, and momentum is able to build on itself.
The management teams and bankers involved in the recent deals told us that the buyside players are changing. Many of the hedge funds and fast money players are gone, heralding a return of the long-term investor. This is important for the newly public company because it gives them the ability to create a better shareholder base aligned with their strategic objectives.
Pricing and valuation are obviously critical to the success of an IPO. Both deals this week seemed to price well relative to their public comps. In the past, this has been a major problem in the industry as management teams, boards, and investors pushed to get the highest valuation and the last dollar out of pricing. It set up an environment where two-thirds of the IPOs missed expectations the first or second quarter after listing. My advice to any company on valuation is to remember two things: First the IPO is not a sale of the company and Second, you are an unproven private company with higher risk--acknowledge that and prove the market wrong. The year-over-year valuation comparisons are getting easier so valuation may prove to be less of an obstacle going forward.
My last point is something we often forget to think about. The IPO is an important job engine for our economy. These two companies employ about 2,000 employees. Bridgepoint didn't exist five years ago. Rosetta Stone had 10mm in revenue five years ago. Both companies create jobs, provide for families and create wealth. We need the IPO market to work in our economy--an economy, if I remember, that was established on entrepreneurship and innovation.
So, kudos to these two for setting the stage. I, for one, feel more positive today than I did last week and who wouldn't want a change in sentiment after the winter we have just barely lived through?