IPOs Fall to Five-Year Low as Economy Slows, Loan Losses Climb

By Elizabeth Hester and Edgar Ortega

July 1 (Bloomberg) -- Initial public offerings came to market in the first half of the year at the slowest pace since 2003, and few investors expect a rebound as economic growth tapers off and loan losses mount.

Through June, 333 companies went public, down from 702 a year earlier, according to data compiled by Bloomberg. The $73.2 billion raised was 41 percent less than during the first half of last year and the least since 2005. For the first time since 1978, U.S. venture capital funds failed to take a company public last quarter.

Investors are leery of betting on newly public companies because the global credit crunch is weighing on consumer confidence. IPOs are one of Wall Street's most profitable businesses, and the slowdown has cut underwriting fees by almost 50 percent to $2.42 billion, Bloomberg data show. Average fees for the first half of 2008 were 3.3 percent of the money raised, compared with merger advisory rates of as much as 1 percent.

``People have become less interested in risk, and when it comes to the IPO market you're typically talking about smaller companies that people know less about,'' said Alex Vallecillo, a fund manager at Cleveland-based Allegiant Asset Management Co., which has $28 billion in assets. ``The issues hurting the market are not going to change overnight, so to expect a dramatic rebound in sentiment is pretty optimistic.''

The world's biggest financial companies have booked almost $400 billion in writedowns and losses amid the worst U.S. housing slump since the Great Depression. Consumer confidence across Europe and Japan has tumbled to its lowest since 2003, and reached a 16-year nadir in the U.S.

IPO Postponement

At least 166 companies have withdrawn or postponed their initial offerings this year, more than double the number in the first half of 2007, according to Bloomberg data. About a third of those were U.S. companies, including Forum Oilfield Technologies Inc., a maker of oil drilling equipment based in Houston, and Liberty Lane Acquisition Corp., the first so-called blank check firm underwritten by Goldman Sachs Group Inc., the biggest U.S. securities firm.

The Standard & Poor's 500 Index has lost 13 percent this year, while the broader MSCI World Index has declined 12 percent for its worst start to a year since 1982. The losses are steeper for new issues in Europe, where a Bloomberg benchmark tracking IPOs has declined 21 percent this year. The U.S. IPO index has lost 9.9 percent.

Offerings from companies backed by venture capital funds have dried up. An average of about 18 firms funded by U.S. venture investors went public in each quarter of 2006 and 2007, according to Arlington, Virginia-based National Venture Capital Association, which has tracked IPO data since 1970. Five such companies completed IPOs in the first three months of this year; none pulled it off last quarter.

`Precedent' Deals

``For investors to really come back, stay back and create that pull for a great IPO market, precedent deals need to be working,'' Mary Ann Deignan, head of equity capital markets for the Americas at Zurich-based UBS AG, said in an interview. ``You need some stability in the secondary markets and issuers need to come to market with compelling valuations.''

Few companies this year have blazed that sort of trail. Visa Inc., the largest payment-card network, raised $19.7 billion, making it the world's second-biggest IPO behind the $22 billion debut by Industrial & Commercial Bank of China Ltd. in 2006. Visa stock has gained 85 percent since its initial sale in March.

``Great opportunities will find a way to get done in generally down markets,'' said Chip MacDonald, a partner in the capital markets group at Jones Day in Atlanta. ``I don't think you're going to see a whole lot of IPOs of companies without earnings at this point.''

Oil Surge

The surge in oil prices to a record $143.67 a barrel has allowed energy companies to raise $9.46 billion in the first half, a 7.2 percent increase from last year. Two years ago, when crude oil futures fetched about $74 a barrel, the total was $13 billion in the first six months of the year.

Higher energy prices may also reduce energy companies' need to raise capital. In the first half, 55 percent fewer oil and gas, pipeline and alternative energy companies went public compared with last year.

``A company looking to do an IPO would certainly want to capture the value implied by those prices,'' said Craig Jarchow, a managing director at New York-based private-equity firm Pine Brook Road Partners LLC. ``Buyers, particularly experienced buyers, are in some cases a little bit leery. The buyers aren't quite where the sellers are in terms of their price view.''

To contact the reporters on this story: Elizabeth Hester in New York at ehester@bloomberg.net; Edgar Ortega in New York at ebarrales@bloomberg.net.
Last Updated: July 1, 2008 00:01 EDT