2009 IPO Report - WilmerHale

4 US IPO Market Review and Outlooksevere than almost anyone anticipated.At mid-year 2009, there are some signs ofrecovery, but the timing and extent of thereturn of economic growth is uncertain.■Capital Market Conditions: Stableand robust capital markets are a leadingindicator of IPO activity. After sharplydeclining in 2008, the Nasdaq stabilizedin the first quarter of 2009 and thenincreased by 20% in the second quarter.The Dow dropped another 13% inthe first quarter, before adding 11%in the second quarter, to approachbreakeven for the year to date. Mostobservers consider the markets’ prognosisfor the balance of the year to be mixed.■Impact of Regulatory Environment:Corporate governance reforms inthe United States have created newresponsibilities for public companiesand their directors and officers.These changes have helped improveaccountability to stockholders, boardoversight of management, board memberqualifications and investor confidence—but have also increased the cost ofbeing public, both in terms of potentialliability and the expense of compliance.The more rigorous corporategovernance environment may detersome IPO candidates, steer themto liquidity through acquisitions, incentthem to pursue IPOs in markets outsideof the United States, or cause themto pursue more unusual capital-raisingtransactions. There is some evidenceto support each of these suppositions.For most companies, however, thesecorporate governance changes can beassimilated into IPO planning and shouldnot pose a major impediment to goingpublic. The choppiness of the IPO marketfor much of this decade has far moreto do with economic and capital marketconditions than regulatory changes.■Venture Capital Pipeline: Venturecapitalists depend on IPOs—along withcompany sales—to provide liquidityto their investors. Only 13 VC-backedcompanies were in IPO registrationat mid-year 2009, according to Dow JonesVentureOne. With the uptick in IPOsby venture capital–backed companiesin the second quarter of 2009, thenumber of such companies enteringMedian IPO Offering Size – 1996 to 2008$ millions30.0199621615.0199633.01997Source: SEC filings12013.0199736.0199822.4681998Source: Dow Jones VentureOne25261.01999Venture Capital–Backed IPOs – 1996 to 200831.31999IPO registration, or resuscitatingdormant filings, is likely to increaseover the balance of the year.46.9 47.8 49.0Longer term, the pool of IPO candidateswill be affected by current trends inventure capital investing, includingthe timeline from initial funding to IPO.According to Dow Jones VentureOne,the median time from initial equityfinancing to IPO increased from 7.2 yearsin 2007 to 8.3 years in 2008—lengtheningthe period of time during which VCbackedcompanies must be privatelyfunded. As recently as 2004 and 2005,this figure hovered around 5.5 years.20184.020002000115.5 116.42001# of deals Median amount raised prior to IPO (in $ millions)22 18 23200120022002119.0200360.220036790.7200473.2200443102.6200552.02005■Private Equity Impact: Private equityinvestors also seek to divest portfoliocompanies or achieve liquidity throughIPOs. PE-backed companies are usuallylarger and more seasoned than VC-backedcompanies or other start-ups pursuingIPOs, and thus can be strong candidatesin a demanding IPO market. Althoughlargely shut out of the 2008 IPO market,buyout-backed companies—especiallylarge and profitable ones—can beexpected to return to the IPO marketas conditions permit.