A buyers' market for US IPOs?

Despite three straight weeks of gains among broader equity markets, US IPO investors pushed hard for discounts in the last wave of deals before Labor Day. Three deals priced more than a dollar below the range; the fourth, Peregrine Semiconductor (PSMI), priced at the low end in spite of hockey-stick forecasted growth; and two more were postponed. The $567 million raised this week was 45% less than the more than $1 billion expected, which would have made it the biggest week since Facebook.

As in the week before, the valuation cuts paid off: Bloomin' Brands (BLMN) and Peregrine rose 17% and 6%, respectively, in their first three days of trading, and Performant Financial (PFMT) gained 18% in its first day. While the largest and highest profile deal, soccer franchise Manchester United (MANU), traded flat in its debut, it was forced to cut its price by 22% just to get out of the door. Since July 24, ten of eleven deals have priced at the low end or below their anticipated ranges, but only two have produced negative returns.

While the widespread discounting indicates a buyers' market, many of the recent deals offered limited upside due to well-defined peer groups, exposure to economically sensitive sectors, muted growth prospects, significant insider selling or high perceived risk.

Unique concepts take off

In the initial post-Facebook stretch, eight of ten deals priced at or above the midpoint. Among these, ServiceNow (NOW), Five Below (FIVE) and Palo Alto Networks (PANW), up 68% on average, each offered extremely strong organic growth and unique concepts or products. Accordingly, investors were very flexible in their valuation targets.

The same cannot be said of Bloomin' Brands, one of several mature casual dining companies, and Peregrine Semiconductor, which operates in the extremely competitive and low-visibility chip sector. The IPO discounts may have pulled investors in, but both companies likely lack the differentiation needed to justify premium multiples.

Quick-service restaurant chain CKE, which postponed its deal on Thursday, had similar problems, compounded by a significant debt burden, substantial selling by its private equity sponsor Apollo and negative reports from McDonald's and Wendy's. Performant Financial's insider selling and high regulatory exposure may have contributed to its low pricing, 31% below the midpoint.

Only one deal on the calendar for next week

In what could be the final deal of August, Hi-Crush Partners LP (HCLP), which produces frac sands for oil and gas companies, will attempt to raise $225 million next week in a deal led by Barclays, Morgan Stanley, Credit Suisse and UBS. It plans to pay an implied 9.5% dividend.

US IPO market update

Year-to-date, there have been 90 US IPOs (down 5% year-over-year), which have together raised $30.6 billion (up 5%). In the past week, mobile advertising platform Millennial Media (MM) and luxury luggage brand Tumi (TUMI) have traded up 52% and 23%, respectively, in response to strong earnings reports and 20 others have gained at least 5%, raising the average aftermarket return from -0.2% as of last week to positive 1%. The average total return for 2012 IPOs is 17%, ahead of most major equity indices.

With performance holding up and the rumored volume of confidential filings, we expect activity to pick up shortly after Labor Day as deals push to price ahead of the presidential election.