Since July, the initial public offering pipeline for all sectors–including the finance industry–has been frozen due to chilly economic conditions and stock market uncertainty.
When will the IPO tap thaw? Soon, says Renaissance Capital Principal Kathleen Shelton Smith, but only after we're fully into the back-to-work fall season and company executives feel more confident about where they're headed in terms of taxes, regulation, and health care.
"When the market shut down this summer, that was the canary in the coal mine," Smith told AdvisorOne.com associate editor Joyce Hanson in a September 7 interview. "It's all about uncertainty. When the Bush tax cuts go away, the marginal rate of taxation could be 40% or even higher. Investors want companies to tell them something about the future, and companies are under the gun."
Data from Renaissance Capital, which is a Greenwich, Connecticut-based IPO research firm, show that since July 8, when Fortune Bank shelved its $360 million IPO, a total of 11 filings in the finance sector have not gone to market. Those 11 filings are just a fraction of the total 168 IPOs that have stalled and are waiting to be priced when market conditions improve. Since June, only six financial companies have actually priced IPOs, including Green Dot (GDOT), Envestnet (ENV)–the accompanying photo shows the Envestnet brain trust ringing the opening bell at the NYSE on July 29–and CBOE Holdings (CBOE).
New Regulation Worries Put Drag on Earnings
But even those companies with successful IPOs are worried, Smith noted.
"How reliable can your earnings be if you're Green Dot or Envestnet, but you don't know what your employees' health costs will be? We don't know now, and there's new regulation that still hasn't come out yet," she said. "When we're in that kind of environment, no wonder investors are sitting on their hands and companies don't know what kind of profits they're going to see. We've got the worst kind of scenario happening right now. The entire investment world is sitting on a Treasury bubble."
In the finance sector, the CBOE Holdings IPO in June started out as the big success story this quarter before it fell off due to regulatory fears. Another success was Green Dot, a leading U.S. provider of reloadable prepaid debit cards, which priced its IPO at $36, above the $32-$35 range. But there's been a lot of bad news in the IPO market. Envestnet's pricing came in at the low end of its range, and Park Sterling Bank's IPO was at $6.50, below the range of $9-$11. Also, Fortune Bank, a recently formed commercial bank led by former HSBC execs, postponed its IPO on July 15 because of poor market conditions.
High-Beta IPOs 'Are Hanging in There With the Market'
During the interview, Smith looked closely at the finance-sector IPOs that have and haven't yet been priced, and she explained why market conditions are preventing them from going through:
AdvisorOne: The average IPO has returned 1.0% from its offer price so far in 2010. Why so low?
Smith: "Remember, year to date, the S&P 500 is down 2.2%. IPOs are not outperforming the market, but they're not underperforming, either. I take a lot of heart that high-beta IPOs are not doing so bad. IPOs are hanging in there with the market."
AdvisorOne: Measured by number of deals, the technology sector comes first and finance comes in second, with 16 deals totaling $2.9 billion and an average first-day return of 8.1%. But then the average total return for the Finance sector is a disappointment: negative 0.1%. Why so different from the first-day return?
Smith: These IPOs started out with strong interest, but they haven't sustained interest beyond the first day of trading. REITs are the lowest performers in the finance sector. The best after-market trading has been in growth companies in the financial segment–Green Dot and Envestnet. They're not a typical yield play. CBOE has really disappointed a lot of investors because of their fears about derivatives regulation.
