Capital Markets Survey Predicts Slow Growth for 2013 IPOs, Although Seeds of Optimism Linger Inside Lower Middle Market

As the year begins to unfold, capital market watchers appear to be cautiously optimistic when it comes to 2013’s IPO landscape, including IPO activities at lower-middle-market companies.

Brian Eccleston, Middle Market IPO watcher and a partner in the Capital Markets Practice of BDO USA, recently shared with Middle Market Executive some of the findings from BDO’s latest IPO Outlook Survey, as well as a few observations about the trend toward smaller deals.

The BDO survey was conducted over the phone and involved interviewing a random sample of capital markets executives from leading investment banks.

“Despite there being very few megadeals out there for 2013, there is still an acknowledgement that we could get up to $34 billion in proceeds — so there’s no question that there’s some optimism in that acknowledgement,” says Eccleston, who believes that some of the newfound optimism can be linked to an uptick in 2012 post-offering returns, which he says averaged 19 percent, compared to a drop of 10 percent in 2011.

“There may still be some of the anomalies that existed in 2012, including pricing pressure. Clearly, pricing came out lower than the bankers would have liked to achieve — but the jump in post-offering returns are a by-product of that,” explains Eccleston.

Certainly, not all of the findings from the BDO survey signaled optimism. According to Eccleston, when asked to identify the greatest threat to the U.S. IPO market in 2013, more than a third (37 percent) of respondents cited the threat of tax increases and government spending cuts, and a similar number (34 percent) highlighted global political and financial instability.

The survey also highlighted an increase in smaller deals. While most executives cited valuation pressures as being responsible for the growth of smaller deals, Eccleston says that the survey showed some evidence that smaller businesses may in part be responsible.

“The second most popular answer was that smaller businesses were going to market, and in light of how some of the guidelines have been eased for smaller business as far as information requests go, this undoubtedly has to help some companies,” says Eccleston, who believes that the easing of filing requirements for smaller firms will likely have a greater impact in 2013, hence escalating the trend toward smaller deals.

According to Eccleston, approximately two-thirds of the investment banking community is predicting a continued increase in offerings in the technology (67 percent), biotech (67 percent), and energy (65 percent) verticals.

“There is clearly a lot of activity in alternative energy and technology, and meanwhile, healthcare continues to have an uptick in optimism,” explains Eccleston, who says that while about half of the survey’s 2012 respondents said that they expected an increase in healthcare IPOs, 70 percent of 2013 respondents said that they expected an increase in that sector.