IPO Backlog Hits Record Despite Market Turmoil

As recent headlines suggest, economic gloom and extreme volatility have taken their toll on the IPO market. In the month of August alone, 21 US companies nixed plans to go public, 11 of which officially withdrew their filings, the most to do so since the onslaught of the financial crisis. While the immediate effects of the capital market fallout have temporarily halted IPO issuance, behind-the-scenes data suggest a more encouraging outlook.

Deals continue to be completed at a healthy pace, with 96 IPO pricings so far this year, as compared with 87 as of early September 2010 and 31 during the entirety of 2008. Filing activity remains robust, reflecting a still sizeable backlog of private companies and, more importantly, a willingness to move forward in the IPO process. As a result, the US IPO pipeline has surpassed the 200-deal mark for the first time in over a decade. Though global turbulence has stymied IPO plans for some and mandated valuation adjustments for others, recent filing activity suggests going public remains a viable route for a large number of strong candidates, even if market choppiness persists. As such, we remain optimistic that deal flow will resume, characterized by a heightened focus on fast-growing companies with strong fundamentals.

Read our full report on the IPO Pipeline.

While the media has harped on the 46 US IPO withdrawals year-to-date as a potential red flag, this data point is misleading. Of these 46, many were weak issuers and ten were acquired, potentially products of a concerted "dual-track" process. Absent a severe double-dip recession, healthy improvements in backlog volume and value put the IPO market on much stronger footing relative to 2008. With 205 submissions year-to-date, IPO filings outnumber pricings two-to-one. During the 2Q11, there were 90 filings, the highest quarterly number in nearly four years and well above the historical ten-year average of 41 filings. As a result, the US IPO pipeline has swelled to 202 prospective issuers, an increase of nearly 20% from the year-ago period and a meaningful rise from the pre-recession backlog of 126 in September 2007.

The return of venture-backed growth stories and the ongoing need for buyout firms to monetize older investments leave us with a product-heavy pipeline of 202 companies, 100 of which have submitted initial filings or amendments within the last month. Given that the IPO market takes its cue from broader market sentiment, August's knee-jerk reaction is understandable: when volatility spikes, IPOs are shunned unless material valuation discounts are offered. While we acknowledge that market fears will be a headwind to what we believe would have otherwise been an extremely active fourth quarter, we continue to believe that the size and quality of the current backlog, combined with a shortage of secular growth stories in the public markets, will enable the IPO window to remain open. That said, with investors holding the cards in today's buyer's market, proposed valuations will need to reflect the current environment in order for deal flow to resume.