With the first quarter of 2012 in the books, the U.S. IPO pipeline has thinned its ranks, as stronger equities markets created enthusiasm among companies to bring new issues to market. In 1Q, both companies and investors felt more confident about IPOs, according to Ernst & Young's U.S. IPO Pipeline Analysis. What's more, their confidence was rewarded as shares of newly issued IPOs rose an average of 32.9 % during the quarter.

As of March 31, there were 164 IPOs with more than $32 billion in filing proceeds registered to go public on U.S. exchanges. That is a drop from 178 IPOs with filing proceeds of $28.4 billion at the end of 2011. 

As 44 new companies joined the pipeline in 1Q 2012, another 39 registrants launched their IPOs and 10 withdrew their offerings from the pipeline. An additional eight companies were omitted due to the fact their registrations have been sitting on the books for more than 12 months. Comparatively, in 4Q 2011, 46 companies registered, 27 went public and 12 withdrew.

The high level of activity was driven by growth companies. More than 70% of new registrants this quarter had filing proceeds of less than $250 million, reflecting two trends: strong interest from private equity and venture capital firms in rolling out their holdings, and strong market appetite for growth companies.

With Facebook's® $5 billion IPO in registration, average deal size increased by 22% to $195 million in 1Q from $160 million last quarter. Two thirds (109 registrants) were seeking $100 million or more at the end of 1Q.

As of 1Q, 23 of the companies registered to go public are from foreign countries. Most were from China, with 12 companies registered, including six new registrants in 1Q. 

Year-over-year pipeline comparison

A sector breakdown of the 164 IPOs currently in the pipeline shows that 31 or 19% are in Technology, 24 or 15% in Oil & Gas, and 20 or 12% in Life Sciences. Retail and Banking and Capital Markets round out the top five sectors. The top three sectors for new IPO registrations combined have 75 registrations, and account for 46% of the total registrations as of 1Q.

Regionally, California continues to lead deal volume with 33 companies seeking $8.2 billion, followed by Texas with 20 companies seeking $6.2 billion, and Massachusetts with eight companies seeking $966 million.  

China is the third largest geographical listing with 12 IPOs seeking $874 million. This recent resurgence of cross-border listings will continue to be a hot trend as the number of foreign companies accounted for 30% of total new registration in 1Q versus 13% in the last quarter of 2011.

The 1Q Review: IPOs Ramping Up and Showing Positive Performance

During the first quarter, 39 effective IPOs were issued, an increase of 44% from 4Q. Although none of the most anticipated large IPOs were priced during 1Q, most of those that came to market performed well. Of the 39 IPOs priced, 33 or 85% had positive returns. The average return for the new offerings was 32.9% as technology companies led the charge. 13 technology IPOs had an average of 61.8% post IPO return.

Notable 1Q companies that priced include: 

• Guidewire Software Inc., priced above range, was trading 137% higher than offer price.
• Brightcove priced within its expected range and was trading 126% higher than its offer price of $11.
• Proto Labs Inc. priced above range had a 113% return since IPO.
• Demandware Inc. also priced above range and shares jumped 86%.
• Annie's Inc. was trading 83% higher after it priced above range.

While the data suggests that for the past three months 178 companies have been looking to bring IPOs to market, some companies withdrew filings.  Ernst & Young's review found that a number of companies exercised other options in lieu of going public. Among them, private-equity (PE) backed Transunion announced its sale to other PE firms for more than $3.3 billion onFebruary 17. Dynamic Offshore, also backed by PE, was bought by SandRidge Energy for $1.26 billion. Platinum Energy Solutions and Merrimack Pharmaceuticals postponed their IPOs because of unfavorable market conditions.

"This is a time when it will be critically important for individual companies to make sure that going public is the best decision," said Herb Engert, Strategic Growth Markets Practice Leader for Ernst & Young LLP. "There is a lot of corporate cash on balance sheets and a lot of options out there. I think we will still see some choppiness in the markets despite increasing market confidence."

During 1Q, Ernst & Young also launched its IPO Center of Excellence (COE) – designed to showcase the organizations full slate of IPO tools so that EY clients on the path to file for an IPO begin the process fully prepared. Using data from both Ernst & Young and Dealogic, clients will be able to analyze IPO activity by stock exchange, industry and geography.

Sector Spotlight: Tech Triumphs in 1Q

As tech companies continue to be the dominant players in the pipeline, there is a danger of comparing the current crop of recently-priced and potential IPOs with those that came to market, exploded higher, but subsequently diminished in value following the tech bubble bursting in 2000.

There are many reasons an IPO can do well, including timing, structure, market conditions, and other crucial factors.  As shown in Ernst & Young's research, the recent spate of technology companies appearing in the IPO pipeline best illustrates the current state of the new-issue market versus what it was for nascent tech stocks in the rocket-fueled IPO days of 1998-2000.

"Times have definitely changed for tech companies looking to bring an IPO to market," said Jackie Kelley, IPO Leader for Ernst & Young LLP. "The companies in the tech pipeline today are more mature, better prepared, and have the financial results in place to tell investors their compelling stories."

From 1998-2000, 130 tech-related IPOs with proceeds greater than $100 million came to market. On average, those companies were in the pipeline for a little more than 78 days and were around three years old. In the 12 months prior to going public, those pre-IPO companies had an average net loss of $21.7 million.

More than 60% of tech companies before the tech bubble were less than three years old and 75% were less than five years old, compared to 10% and 25%, respectively for today's tech companies. A few firms in the dot-com era were only a year old, a sign of young companies rushing into the public market for capital.

The new crop of tech players presents a very different picture. The 63 tech companies that went public since 2010 and the ones in registration have been in the pipeline for just under 154 days on average and are around seven years old. In the 12 months prior to going public, they had stronger financial results, with an average net loss of just $8.8 million (59% reduction), EBITDA of$90.7 million (854% increase) and revenue of $529.2 million (115 % increase).

What's New: Watching Washington

While 1Q saw a number of deals greeted by strong investor demand, political issues for the remainder of this election year will need to be closely evaluated and weighed.

For example, the recently passed JOBS Act contains various provisions that will help less mature, high-growth companies gain access to capital. By easing certain corporate restrictions and reporting requirements, companies will be able to obtain the capital they need to scale-up rapidly. So, the JOBS Act should help create a more favorable environment for job creation and entrepreneurial growth in the United States.

At the same time, concerns exist that some components of the JOBS Act could undermine investor confidence. Market performance will have the most telling effect on whether investors embrace offerings from emerging growth companies (EGC), and whether such support comes with a risk premium in comparison to non-EGC companies. Emerging growth companies are high growth companies that typically provide a very healthy return on investment as they scale up.

Companies and investors will need to carefully consider the effect these changes have on their short- and long-term capital needs in evaluating whether to access the public markets.

The Ernst & Young U.S. IPO Pipeline analysis is issued quarterly as a forward-looking indicator of the IPO market.  The IPO Pipeline data are refined to eliminate bias from financial services organizations, real estate investment trusts (REITs), and other holding companies that represent assets under management instead of core businesses.  It also eliminates any registrations sitting on the books for more than 12 months – long-term applicants that may bloat numbers, but don't reflect current market trends.