The week ahead: high quality financial and technology IPOs
11 mostly high quality deals are on the IPO calendar to raise $2.7 billion during the week of December 8, 2014. Technology IPOs have been underrepresented in the second half of 2014, representing just 10% (12 IPOs) of total deal flow, compared to 25% during the 1H14. Since July, 8 have focused on software and apps, but that number could jump to 13 by Friday. The week should also see major financial IPOs, including the upsized $750 million offering of peer-to-peer lending site LendingClub. It is worth noting that two of the quarter's most active sectors, energy MLPs and biotechs, are absent from this week's calendar, though Rice Midstream Partners LP set terms Monday morning to raise $500 million next week.
Early in the week should see the two largest deals, online loan marketplace LendingClub and Nordic REIT Polar Star, as well as the week's largest tech IPO, Chinese social network Momo. Seven more IPOs are expected later, including 4 high growth and unprofitable enterprise software companies, such as app analysis software maker New Relic and Hadoop distributor Hortonworks.
LendingClub: First peer-to-peer finance IPO
LendingClub (LC) offers IPO investors their first chance to own an online financing IPO, which could encourage several more to file. The peer-to-peer lending marketplace, which facilitates lending for ordinary investors and borrowers but does not actually take on credit risk, is the largest and most well known in the nontraditional lending space. With about $3.3 trillion in outstanding consumer loans, LendingClub hopes to disrupt a massive market. The company competes with online lender On Deck Capital (ONDK), set to price its IPO next week. LendingClub increased its range on Monday morning, likely indicating high demand for the unique stock.
Momo: A go or a dodo?
Momo is set to raise $216 million at a proposed market cap of $2.7 billion, the second largest of the week. It could be the first Chinese technology IPO since Alibaba (BABA) raised $22 billion in September. Already a top shareholder, Alibaba plans to invest another $60 million, with $10 million more from October 2013 IPO 58.com (WUBA). Momo is the third largest mobile social instant messaging app in China, behind Tencent-owned services WeChat and Mobile QQ. Momo could be the second China-based social network to go public in the US this year after April IPO Weibo (WB), the Alibaba-backed "Twitter of China," which recently fell close to its offer price.
Growing fast and burning cash: four enterprise software IPOs
The largest of the four by market cap, New Relic (NEWR) provides software that analyzes enterprise software and applications. After HealthCare.gov was launched, New Relic was used to identify the major pain points. New Relic has achieved a wide customer base of mostly small businesses, but has begun targeting larger accounts, already securing sales from Tableau (DATA), GoPro (GPRO), Adobe and GE. With strong backers (Benchmark, Blackrock, T. Rowe) and sales growth of over 80% with a $100 million annual run-rate, IPO investors must believe it can overcome the hurdle of near-term losses (and a $100 million accumulated deficit).
Hortonworks (HDP) contends that the global Hadoop market will grow to $50 billion by the end of the decade as organizations replace their old data architecture to accommodate business models built around data analysis. The company sells maintenance and support subscriptions while continuing to keep Hadoop open source, a competitive differentiator. The elephant in the room, however, is the company's sustained massive loss of cash as it attempts to take a slice of the pie, and its LTM adjusted operating loss of $84mm is the largest of any IPO YTD (the next highest software IPO, Castlight Health (CSLT), had -$60 million). While gross billings grew about 120% in the 9mo14 to $53 million, its current earnings margin of -200% could scare off risk-averse investors who want to see a longer track record of a company developing free software. Yet with impressive backers (Yahoo, Benchmark), partners (Microsoft, HP) and customers (AT&T, Bloomberg, Home Depot) Hortonworks has an established position and could reasonably be a takeover target as well.
Workiva (WK) sells a cloud-based platform that it claims offers greater control and data integrity for public companies filing online documents with the SEC. With an accumulated deficit of over $100 million, Workiva's cash burn is also an issue. However, its blue-chip customers include 60% of the Fortune 500 and high revenue retention rate lend credence to its product, and growth has been 34% this year.
A play on healthcare reform, Connecture (CNXR) offers software that helps automate health insurance marketplaces, including Medicare.gov. Assuming implementation of the PPACA goes as planned, Connecture's product could be attractive to more marketplace operators, though currently 10 customers generate 60% of revenue. And unlike the other three software IPOs this week, Connecture is quickly approaching profitability as sales grew 70% to $57 million in the 9mo14. Other recent health insurance tech IPOs include Castlight Health (CSLT) and Benefitfocus (BNFT), both of which spiked over 100% on day one but now trade below the offer price.
Private equity: 3 foreign financial firms and 1 auto parts LBO
Ireland-based Avolon Holdings (AVOL) is expected to raise $300 million for selling shareholders. The company is owned by Oak Hill Capital, Cinven, CVC Capital Partners and GIC Private Limited. The airline sector has done very well this year, and recent IPO Virgin America (VA), which leases its entire fleet, trades over 50% above its offer price. Another aircraft lessor, Intrepid Aviation (INTR), recently updated its 3Q14 financials and could soon launch a $150 million offering.
James River Group Holdings (JRVR) went public in 2005 but was taken private two years later by D.E. Shaw and Goldman Sachs. Now they seek an IPO exit as each each investor floats half of the $250 million offering. A successful IPO from James River could encourage fellow Bermuda-based specialty insurer Ironshore (IRSH), on file since June, to launch its offering.
Formed by Oslo-based Obligo Investment Management, Polar Star Realty Trust (PSRT) owns 26 office and industrial properties in Sweden and Norway and is expected to raise $500 million. The company benefits from high occupancy rates and low regional unemployment, though its high customer concentration could raise concerns. There have been about one-fourth the number of REITs this year compared to 2013, but recent IPOs Paramount Group (PGRE) and STORE Capital (STOR) each raised over $500 million and trade above their offer price. REIT valuations have climbed higher than historic levels, suggesting more could be on the way.
Backed by American Securities, Metaldyne Performance Group (MPG) is the week's only LBO and the second largest deal by enterprise value. The powertrain and safety components manufacturer represents a consolidation of three auto parts makers (HHI, Metaldyne, Grede) with relatively good organic growth (6%) and a large backlog ($435 million), though investors may be wary of its formerly bankrupt predecessor businesses. Most LBOs this year have received pushback on valuation, though the last auto-focused LBO to go public, Axalta Coating Systems (AXTA), now trades over 25% above its offer price.
| Renaissance Capital's IPO Calendar - Week of 12/8/2014 | ||||
| Issuer Business |
Symbol Exchange |
Deal Size $mil |
Price Range Shares Filed |
Top three underwriters |
| LendingClub San Francisco, CA |
LC NYSE |
$750 | $10.00 - $12.00 57,700,000 |
Morgan Stanley Goldman Sachs Credit Suisse |
| Largest online marketplace for personal and small business loans. | ||||
| Polar Star Realty Trust New York, NY |
PSRT NYSE |
$500 | $10.00 - $13.00 43,478,261 |
FBR Capital Markets Wunderlich Securities ABG Sundal Collier |
| REIT formed to own office and industrial property in Norway and Sweden. | ||||
| Metaldyne Performance Group Plymouth, MI |
MPG NYSE |
$300 | $18.00 - $21.00 15,384,615 |
BofA Merrill Lynch Goldman Sachs Deutsche Bank |
| LBO'd producer of powertrain and safety components for light vehicles. | ||||
| Avolon Holdings Dublin, Ireland |
AVOL NYSE |
$300 | $21.00 - $23.00 13,636,363 |
J.P. Morgan Morgan Stanley Citi |
| Aircraft lessor with a total portfolio of 227 mostly narrowbody aircraft. | ||||
| James River Group Holdings Hamilton, Bermuda |
JRVR NASDAQ |
$253 | $22.00 - $24.00 11,000,000 |
Keefe Bruyette Woods UBS Investment Bank FBR Capital Markets |
| Provides casualty reinsurance and excess and surplus lines insurance in the US. | ||||
| Momo Beijing, China |
MOMO NASDAQ |
$216 | $12.50 - $14.50 16,000,000 |
Morgan Stanley Credit Suisse J.P. Morgan |
| Chinese location-based meeting and messaging app with 60 million monthly users. | ||||
| Workiva Ames, IA |
WK NYSE |
$101 | $13.00 - $15.00 7,200,000 |
Morgan Stanley Credit Suisse |
| Offers a SaaS platform used by companies to manage the SEC filing process. | ||||
| New Relic San Francisco, CA |
NEWR NYSE |
$95 | $18.00 - $20.00 5,000,000 |
Morgan Stanley J.P. Morgan |
| Provides a cloud-based software analytics platform. | ||||
| Hortonworks Palo Alto, CA |
HDP NASDAQ |
$78 | $12.00 - $14.00 6,000,000 |
Goldman Sachs Credit Suisse RBC Capital Markets |
| Develops and supports open source distribution of Hadoop for enterprises. | ||||
| Connecture Brookfield, WI |
CNXR NASDAQ |
$75 | $12.00 - $14.00 5,769,231 |
Morgan Stanley J.P. Morgan |
| Powers public and private online health insurance marketplaces. | ||||
| S1 Biopharma New York, NY |
SXB NASDAQ |
$23 | $12.00 - $14.00 1,750,000 |
MLV & Co |
| Developing a combined therapy of existing drugs for female sexual dysfunction. | ||||
IPO Pipeline update
There are now 119 IPOs in the pipeline seeking to raise about $23 billion. Azul (AZUL.RC), Brazil's third largest airline, was the week's only initial filer due to timing around the holidays. The company could raise as much as $500 million, and was likely encouraged by the performance of airline stocks including the reception of November IPO Virgin America (VA; up 56%). Silver Lake/TPG telecom technology provider Avaya (AVYA) recently updated financial results for its $1 billion IPO, amending its offering for the first time in a year.
Recent IPOs and YTD IPO trends
In the past week, 1 IPO raised $65 million, bringing the year's total to 262 IPOs and $82 billion in proceeds. Histogenics (HSGX), which is developing knee cartilage repair technology, priced significantly below the range and traded up on its first day, but ended the week at its offer price.
The Renaissance US IPO Index, a market cap weighted basket of newly public companies designed to represent the US IPO market, has gained 8% year-to-date. Renaissance Capital's IPO ETF tracks the index, and its top holdings include Alibaba (BABA), Zoetis (ZTS), Twitter (TWTR), Hilton (HLT) and ING U.S. (VOYA).
