What's In Store for IPOs?

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Social media companies have commanded the headlines in the initial public offering market for 2011, a trend that's expected to continue in 2012 when Facebook unveils its widely expected plans to come public. But while public issues of Groupon (ticker: GRPN) and LinkedIn (LNKD) have commanded the headlines, the IPO market has been more diverse, including the return to the public market of General Motors (GM), the retailer Dollar General (DG) and Arcos Dorados Holdings (ARCO), the franchisee of McDonald's (MCD) in Latin America.

The performance of the IPO market, however, has suffered as overall market volatility has wrought havoc on new issues. The FTSE Renaissance IPO Composite Index is down 18.3% year-to-date. Kathleen Shelton Smith, a principal at Renaissance Capital, a leading provider of research and banking services for the IPO market, spoke with Barrons.com about the conditions and the outlook for the IPO market.

Barrons.com: Before we look ahead to 2012, let's recap the IPO market for 2011.

Smith: We started out the year on a very strong note with returns that were superior to the overall marketplace all the way through June. In the second half, the returns have dropped below benchmarks as the European sovereign-debt crisis started to take its toll on the overall market, causing a high level of volatility. With high volatility, investors quickly move out of unseasoned equities.

Q: Now your research shows that following periods of high volatility the performance of IPOs tends to outpace that of the overall market. Is there any reason to expect that dynamic should be different this time now?

Kathleen Shelton Smith

A: We think we will see that again. It is just hard to know the timing of it. But we can look to the past patterns, and we see that has existed through past downturns including the 2001 downturn and then also the 2007-2008, where in both cases IPOs have strongly outperformed benchmarks. So we don't see why that would not happen again, and the reason for that is that usually coming out of these periods only the strongest companies and most attractively valued companies generally go public.

Q: Now from an individual investor's perspective, what is the best strategy to pursue in trying to capture some of the returns that IPOs offer? Is it better to try and identify the one or two names that figure to be just home runs or is it better to buy the field and let the winners offset some of the inevitable losers?

A: We think it is very challenging for all investors to pick the IPOs that are going to be good ones and certainly to try to obtain them from the underwriter at the time they are offering the shares. You are better off to find a professional manager who offers you a portfolio of those IPOs with asset management behind it. Anyway, we offer such a portfolio through the Global IPO Plus Aftermarket Fund (IPOSX). I think diversification is an important part even in owning these newly public companies.

Top 10 Holdings

Global IPO Plus Aftermarket (IPOSX)

(as of Sept. 30, 2011)

Avago Technologies AVGO
Dollar General DG
Verisk Analytics VRSK
Arcos Dorados ARCO
LinkedIn LNKD
Mead Johnson Nutrition MJN
Sensata Techologies ST
Nielsen Holdings NLSN
Pandora Media P
SodaStream International SODA

Source: Morningstar

Q: Tell me about the characteristics of the Global IPO Plus Aftermarket Fund.

A: The fund has currently 50 newly public companies. The fund tends to look like a small- or mid-cap portfolio. The goal is to find the companies that will eventually be widely held in many institutional portfolios.

Q: Are there still opportunities for investors to find the next Google (GOOG)?

A: Yes. I think a lot of investors feel that Facebook may be the Google of 2012. So there is that kind of gold ring I think investors are looking for. How do I get and own the next Google? But I think that's not necessarily the best way to be looking at the IPO market. You want to look for the stocks that institutions are buying right off the bat.

Q: Now a lot of investors feel as though they were burned by newly public companies during the tech bubble with the close of the 1990s. What lessons learned from that experience can apply today?

A: Certainly there are times when you can get burnt in the IPO market. Definitely in 1999, 2000, in 2008 and in this last half of 2011, this has not been an attractive place to be. However there are the years in between where it is an attractive place to be. So, expect the volatility of it, and if you can hold through the volatility our data shows that there are positive returns that come out of IPO portfolios as long as they are diversified, and they can over the years produce positive returns.

It is just that you are going to see these much more volatile swings of declines along with swings of gains.

Q: Is there still a strong backlog of companies looking to come public?

A: Yes. Look at some of the names that have recently filed—[apparel maker] Michael Kors has filed for a $750 million offering. The apparel and footwear retailer Tilly's, Restoration Hardware, GameFly, an online videogame rental concern.

Q: Thanks for your time.

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