The United States has long been known as the best location to take a company public. Its currency is a safe-haven globally and the amount of cash domiciled in the U.S. institutionally is bigger than most developed nations have; in U.S. Money Market accounts, cash and deposits alone, there is more than $10.8 trillion dollars there (2014 year ending data, U.S. Federal Reserve).
The current IPO market returned on average over 32% in deals financed in the second quarter alone. Looking closer, the number of deals coming to market in just the last week is staggering. Seventeen deals filed for Registration during the week ending September 14th with only five of those IPOs going Effective, raising over $4.8 billion.
The private placement market in the U.S. is just as resilient. According to Deal Flow, from Sept 15th to the 21st, 34 deals were completed raising $660 million while Reg A offerings that week (11 deals) aim to raise another $277 million as well as 33 PIPE deals that raised $2.3 billion. And that’s just within the last seven days.
As great as that seems, foreign investors are all but ignored. Europe or Asia stands outside looking in. Even Canada, where most mining deals originate, is alienated. While banks in Europe have all but stopped underwriting completely, though the Asian market has been active it is confined.
Is there so much cash and demand within the borders of the United States that investment bankers there don’t take a more global approach to the IPO market? That’s partially true. There is demand within the U.S., but there are also banking regulations that have all but closed the door on foreign investment. The recent spate of trade wars with Canada, Europe and China from the Trump White House isn’t helping. That regulatory environment leaves many foreign investors outside without a means of getting their cash into the United States, let alone the contacts to get in on the IPO scene.
U.S. investment bankers underwrite deals within sectors that look good. Research shows that investors in the United States can quickly look up information on a sector to gauge against shares being offered in an IPO. This value is quite unique to the United States and Underwriters there know and count on that information to support their share price valuations. Standard & Poor’s as well as U.S. government agencies and third-party research are readily available to investors within the United States – and there are Rules that govern what kind of information is provided, giving investors a comfort level on the reliability of that information (Prudent Man Rule).
What grabs attention are the larger IPOs, but for every large deal an underwriter brings to the market in the United States there are double that number in smaller transactions (-100M). Underwriters too vary by financial capability (capital limitations) and by sector, with some investment bankers specializing in certain arenas that they know.
Bought Deals are nearly unheard of, where a group (syndicate) of investors buy the majority of an IPO. Usually, investment bankers first look to place as much of the stock as they can with ‘managed accounts’ (family funds, etc), the balance is then handed down to retail brokers to place. Only when deals are large enough are they syndicated, but that same process takes place in multiple firms that participate in the IPO with retail investors getting the balance. That self-serving affect gives the investment banker the bulk of the IPO commissions. The size of the offering or the size of the investment banking firm doesn’t matter.
Investor appetite plays a crucial roll in IPO share placement in the United States, so the capital structure – and revenue/earnings picture are key. But the sector a company is in must also show investors (institutional and retail) an upbeat outlook (current) such as energy, technology, even biotech and transportation.
Lawyers, accountants and listed exchanges all play a crucial role in underwriting an IPO, it’s not just the Underwriter. If you’re not familiar with those professionals, the Registration work can become prolonged and expensive. Without taking underwriters’ commissions into account, it can cost upwards of 4% of the gross amount being raised to pay for an IPO. Commissions range from 6% to as high as 10%, depending on the quality of the company going public. Those fees are weighed against the quality and structure of an IPO; the tougher the deal, the higher the commission. By law (FINRA), investment banks can charge as much as 13% (10% commission, 3% unaccountable expense allowance). By foreign standards, that may seem excessive. But in the United States, that’s how it works. So, the better the deal, the lower the cost and if a Syndicate was buying the majority of that offering, costs would be at their lowest.