The once-moribund market for initial public offerings heated up in 2006, giving savvy investors an opportunity to beat the market by a wide margin. IPOs gained 24% through Dec. 8, vs. a 13% gain for the Standard & Poor's 500-stock index, according to Renaissance Capital in Greenwich, Conn., as the amount of money raised jumped 19%, to $38 billion. Big winners included Chipotle Mexican Grill Inc. (CMG ), up 151% since January, and MasterCard (MA ), up 157% since May. In fact, the offerings for Chipotle and the New York Mercantile Exchange Inc. (NMX ) each doubled in their first day of trading, feats that hadn't happened in five years. And even investors who missed those first-day run-ups still saw healthy returns.
The market looks just as solid going into 2007. And as the economy slows, upstarts with strong growth potential will look more appealing, says David Antonelli, chief investment officer at MFS Investment Management in Boston.
The private equity boom should keep feeding the IPO market directly. All told, buyout firms brought 77 issues to market in 2006 through Dec. 8, and their average gain was 23%, according to Dealogic. Not all private equity-backed IPOs perform well, of course. According to a study of almost 500 so-called reverse LBOs by professors Jerry Cao of Boston College and Josh Lerner of Harvard University, companies going public less than a year after being taken private trailed the return on the S&P 500 by almost five percentage points over the next three years. In contrast, more patient companies that waited more than a year to go public again beat the S&P by 24 percentage points. With the docket of private equity-backed IPOs expected to be thick in 2007, investors should examine those offerings especially carefully.
THE FINANCIAL SECTOR PROVIDED the most action in 2006, with 48 deals valued at $7.5 billion through the end of November, according to Dealogic. The strength is likely to continue in 2007, analysts say. Investors will get their best shot at the private equity boom when Fortress Investment Group makes its debut. The eight-year-old firm run by alumni of Goldman Sachs Group Inc. (GS ) and Blackrock Financial Management oversees $13.6 billion in private equity money out of $26 billion of total assets. The Chicago Board Options Exchange Inc., one of the few exchanges still in private hands, is considering going public as well. First, it must convert from a membership-owned group to one owned by shareholders.
The slow but steady return of technology IPOs is expected to continue. Tech and telecom stocks generally did well in 2006, helping push open the IPO window, says Dan Genter, president of RNC Genter Capital Management in Los Angeles. The S&P 500's tech index gained almost 25% from mid-July through Dec. 8. "Coming off a pretty good year, you're finally seeing some recovery on the tech side, and there's plenty more to go there," he says. A few companies that have filed to go public in early 2007 look promising. Francis Gaskins, editor of IPODdesktop.com, likes Supermicro Computers Inc., a computer-server maker that has been profitable for 17 straight years and boasts solid growth. Time Warner Inc. (TWX ) is expected to spin off its cable unit, but Gaskins says he'll wait to see how the unit is valued relative to the roughly $3,000 per subscriber figure for rivals.
There were some duds in 2006, too, including Web phone service provider Vonage Holdings Corp. (VG ), down 58% since its May ipo, and travel site Traffic.com (TRFC ), down 35% since January. The flops show that investors haven't forgotten the bubble years. Says Tim Walker, industry editor at financial research firm Hoover's Inc.: "Things aren't rolling so high that we'll just give money to anyone."
By Aaron Pressman