The Good and the Bad of the IPO Market

The third quarter IPO market is like looking at a Rorshach test: You can find data to support that liquidity is getting better or data to support that it’s getting worse.

Here’s the reality check: There is an increase in deals– a big increase if you look at the first nine months of the year and compare it to the first nine months of 2009. And the pipeline is building: 67 new companies entered IPO registration since July, and if they go out, they could be the biggest issues so far this year.

Let’s hope that’s the case because the downside to the news is that deal value is falling substantially year-over-year. In the third quarter of 2010, there were 32 IPOs, compared to just 20 in the third quarter of 2009. But only one was valued at more than $500 million. (All numbers are courtesy of PricewaterhouseCoopers’s third quarter IPO watch.)

That means the deals going out are small and when you’re talking about venture capital returns, the smaller the deal the more thinly it’s traded. In essence, a lot of these “exits” aren’t really exits at all because VCs aren’t getting much liquidity. If they sell their shares, they tank the stock. In practice, some of them may give investors less liquidity than some late-stage secondary rounds out there.

There’s another ripple effect to anemic deal values– it hurts the price of acquisitions because there’s no threat to anyone going public. Think of it like listing a house on a market and getting one bidder. That bidder has all the power.

The quarters when deal values have been higher, the top line numbers were heavily skewed by a few large deals– and most of those are coming from other countries, especially China. Year-to-date, 30 non-US companies have raised $4.1 billion, about 30% of both proceeds and total offerings. And 19 Chinese companies have made up about 20% of the deal volume. Yep, they’ve taken over Japan in GDP, taken over US manufacturing, it’s the world’s largest Web audience and now Chinese companies are making up one-third of own IPO volume.

Get used to it, America. Beyond China, more nascent emerging markets are taking advantage of the overall smaller deal sizes to IPO on more prestigious and stable US exchanges. India’s online travel site MakeMyTrip went public in August and had a 90% first day pop. It has held up well since, opening the door for more mid-sized ecommerce companies from countries under represented on the Nasdaq and New York Stock Exchange. Argentina’s outsourcing firm Globant is still eying an exit in the next year, and there are no doubt some issues coming from Brazil. It’s all about growth when you’re talking about IPOs this small and until a Facebook or LinkedIn IPO steals the attention, emerging markets are the best growth story out there.