US IPOs Strengthen in Q1

Investor fascination with IPOs paid off in the first quarter. Returns on US IPOs during the first three months of the year were "exceptionally strong," according to Greenwich, Conn.-based Renaissance Capital, rising 31% on average from the IPO price as underwriters discounted many deals. As a result, 85% of IPOs this quarter traded positively, and one in four IPOs rose 50% or more from their IPO price.

US IPO returns are up 27.6% year-to-date, the company reports.

That's a surprising turnaround from what Renaissance Capital described as a "dreadful 2011," when the global IPO market essentially collapsed, resulting in the worst IPO returns since 2007. In the US last year, two dozen Internet companies went public and four of the five largest-ever US Internet IPOs -- Bankrate (NYSE: RATE), Groupon (Nasdaq: GRPN), LinkedIn (NYSE: LNKD), and Zynga (Nasdaq: ZNGA) -- raised $2.4 billion.

But IPO performance declined across the board, with US offerings significantly underperforming the S&P 500 and ending with average returns of minus 11.8%. This year, however, the US IPO market is "making progress," reports from Renaissance Capital show. And while IPO proceeds fell 56% to $5.9 billion, deal activity rose 31%.

Table 1: US IPOs

	2005	2006	2007	2008	2009	2010	2011		1Q11	1Q12
Total Proceeds (billions)	$33.70	$42.20	$49.00	$24.50	$21.90	$38.70	$36.30		$13.40	$5.90
No. of Deals	192	196	214	31	63	154	125		32	42
Note: US IPOs include IPOs of all deal sizes. Data as of March 30, 2012.

Global IPO proceeds declined 66% year-over-year to $12.5 billion, and deal activity fell 52%, Renaissance noted.

The first quarter results confirm what Kathleen Shelton Smith, founder and principal of Renaissance Capital, predicted last September. At a time when the IPO market had slowed to a drip, she bet that the market would snap back, with the strongest and most attractively valued issues hitting the market first. Once the market recovered, she said IPOs will outperform the overall market, and the outperformance will exceed 2011's underperformance.

US IPO investors favored smaller emerging growth IPOs during the period, including on-demand software firms such as Guidewire Software Inc. (NYSE: GWRE), up 133% from offer price year-to-date. Other firms popped in the first quarter, including Brightcove (Nasdaq: BCOV, up 128%, and mobile Internet firms such as Yelp Inc. (NYSE: YELP), which connects people to companies through online reviews, up 78%. But those returns have since declined. (Yelp is up less than 3% on the year, and Brightcove is up nearly 40%.)

In addition to Guidewire, other top performers in the past 12 months include Michael Kors Holdings (NYSE: KORS), up 134%; LinkedIn, up 120%; and Jive Software (Nasdaq: JIVE), a provider of social and collaborative enterprise solutions, up more than 116%. (See Jumpin' Jive.)

The FTSE Renaissance US IPO Index, which Renaissance sponsors in partnership with FTSE Group, a global index provider owned jointly by the Financial Times and the London Stock Exchange, also fared well. It produced a 19.4% first quarter return.

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