IPO markets: best quarter since 2010

Alibaba breathed even more life into an already hot quarter

By Bloomberg News

Sep 30, 2014 @ 9:31 am EST

Ali ... who? One company dominated the conversation about initial public offerings in the third quarter, and for good reason: Alibaba Group Holding Ltd. (BABA) raised a record-breaking $25 billion in the U.S. this month.

Leave it out of the total raised, though, and the three months through September were still the busiest for IPOs in four years. From German online retailer Zalando SE to WH Group Ltd. (288), the world's largest pork producer, companies raised $41.8 billion through yesterday, data compiled by Bloomberg show. In the U.S., it was the busiest third quarter in more than a decade — also without Alibaba included.

Record stock prices are drawing sellers to the market while investors hunting for returns have been rewarded for betting on new stocks: Globally, the median performance of newly-listed shares this year was nearly three times as much as the broader stock market. While a drop in share prices or a few high-profile flops could slow down deal making, the IPO market is for now feeding off of the success of deals like Alibaba's.

“Alibaba breathed even more life into the IPO market,” said Liz Myers, global head of equity capital markets at JPMorgan Chase & Co. “It has definitely helped to enhance the sentiment for new deals in what has been a busy IPO calendar year.”

Including Alibaba, IPOs globally raised $66.8 billion during the quarter, the most during this period ever. About $40.1 billion of that was raised in the the U.S., with another $8.6 billion in Europe and $14.3 billion in Asia, data compiled by Bloomberg show. For the first nine months of the year, the global total has reached $182.7 billion.


The demand for IPOs has created an opportunity for sellers to start exiting long-standing investments. Yahoo Inc., which invested in Alibaba in 2005, profited by selling shares of the e-commerce company to fund managers drawn to its exposure to Chinese consumers. Royal Bank of Scotland Group PLC spun off its U.S. unit Citizens Financial Group Inc. (CFG) and ING Groep NV sold almost one-third of insurer NN Group NV.

Also in Europe, Germany's Samwer brothers sold a stake in Zalando, the continent's largest online-only fashion and shoe retailer. The company will raise as much as $768 million in Germany's first big technology IPO since Deutsche Telekom AG listed its dial-up business in 2000.

The Samwers have another IPO in the pipeline. Rocket Internet AG, the investment vehicle that backs Zalando and replicates businesses from Groupon Inc. to Airbnb Inc., is expected to set the price of a potentially $1.8 billion sale later this week.

Globally, private-equity firms were the most active sellers this quarter, accounting for 27% of deals by number and 64% of capital raised, according to a study by consultancy Ernst & Young.

Silver Lake Management was among private-equity sellers that gained in the quarter. The technology-focused buyout firm, which injected $825 million in Alibaba along with affiliates in 2011, stands to make more than 550% after the IPO, a person familiar with the matter said Sept. 20.


Even though Alibaba soaked up $25 billion of investor capital, fund managers continue to put more cash toward IPOs.

“It's not a capital-constrained market, it's an opportunity-constrained one,” said Paul Donahue, co-head of equity capital markets at Morgan Stanley. “As a class, IPOs are still working. As long as underwriters and business owners remain responsible with valuation and positioning, the broader backdrop still remains conducive to IPOs.”

The New York Stock Exchange, where Hong-Kong based Alibaba chose to sell shares, was the top exchange by funds raised, according to the Ernst & Young report. U.S. markets overall accounted for 52% of cross-border IPOs during the quarter.

“Supportive legislation and regional market performance is contributing to the rising trend of cross-border IPOs,” analysts at the firm wrote. In the third quarter, 14% of IPOs globally were cross-border, compared with 7% at the same point last year.

In the U.S., IPOs returned an average of 19% over the quarter, whereas the broader S&P; 500 Index rose just 0.9%. In Europe, IPOs that started trading in the quarter were up 11%, compared with a 1% decline in the benchmark Stoxx Europe 600 Index. In Asia the jump was 64% over the period, as the MSCI Asia Pacific Index slipped 3.1%.


The IPO market remains susceptible to a reversal in stock prices and corresponding pickup in volatility, which makes pricing new deals difficult. WH Group, the owner of Smithfield Foods Inc., raised about $2.4 billion in Hong Kong in July, three months after the company and investors dropped a plan to sell more than $5 billion of stock as equities fell.

Hong Kong led a global decline in stocks again yesterday, after pro-democracy protests in the city were met with a police crackdown. Major benchmarks across the world have posted a week of losses while in the U.S., markets have become more volatile with the Dow Jones Industrial Average alternating between gains and losses of more than 100 points the previous four days.

High-profile deals like Alibaba's also have the power to shut the entire global IPO market if they don't fare well, according to Goldman Sachs Group Inc.'s Richard Cormack.

“Alibaba's success is certainly helpful for global IPO markets,” said Mr. Cormack, the firm's co-head of equity capital markets for Europe, Middle East and Africa. “Had it not done well, the impact would have been more dramatic on the downside.”

One factor behind Alibaba's success was its relatively conservative pricing: The company sought a lower price-to-earnings valuation than its Chinese Internet peers and raised its fundraising target by just 3%.

Like Alibaba, other companies with high growth prospects fared well in the IPO market. Mobileye NV (MBLY), the Israeli company creating software for driverless cars, raised $890 million in July after increasing the size of its IPO by 28% and surged on its debut.

Rocket Internet almost doubled the amount it's seeking to raise in an initial public offering to $1.8 billion after receiving enough orders to cover the sale across its price range.

“The level of appetite and interest in IPOs post-summer has been a pleasant surprise and most of the transactions that came to the market in the quarter were well-received,” said Nick Williams, head of equity capital markets for Europe, the Middle East and Africa at Credit Suisse Group AG. “As long as companies are disciplined on pricing and deal structures, we expect that to continue for the rest of the year.”

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