Executive Chairman, NMI HOLDINGS INC
Schuster Sees `Pent Up' Demand for U.S. Technology IPOs
Dec. 29 (Bloomberg) -- Josef Schuster, founder of IPOX Schuster LLC, talks about the outlook for U.S. technology initial public ...
About Bradley Shuster
In a 2012 interview, Bradley Shuster, founder of IPOX Schuster LLC, discussed the state of the U.S. initial public offering market. He described the year as "a pretty good year in terms of IPO performance," noting that IPOX strategies had outperformed for a third consecutive year, driven by companies such as Visa, Philip Morris, and Johnson & Johnson. Shuster stated that many technology IPOs, particularly social media companies, had been "priced really at the top of their potential market cap right out of the gate," leading to volatility and declines for firms like Pandora, Yandex, LinkedIn, and Groupon. Shuster expressed that there remained "a lot of pent up demand for the US dollar deal," especially for large brands, though he said the volatility in tech IPOs could affect the valuation of Facebook's upcoming offering. He advised that "investors and long-term investors especially should stay away from IPOs like Groupon," where the float is used to maximize initial market cap. Regarding pre-IPO investing, Shuster noted its increased popularity but cautioned that retail investors "should be very careful" due to substantial downside risk once companies begin public trading.
Transcript (15 segments)
I
Interviewer0:00
This year saw a pickup in initial public offering activity here in the United States. The top offerings of the year: Samsonite International, the luggage maker, that was back in February, followed by Dollar General, the retailer, as well as Zynga, the games maker. Now we also saw the highly anticipated initial public offerings of Groupon and LinkedIn. Social media next year's big offering, no doubt, Facebook, but what else can we expect from the initial public offering market? With me now, joining us from Chicago, is Joseph Schuster. He is the founder of IPOX, a research firm. Schuster, good to have you with us.
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Joseph Schuster0:36
Thank you.
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Interviewer0:36
Joseph Schuster, tell us about the initial public offering market. I mean, when you look at where the money has gone, could you consider it healthy and robust this year?
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Joseph Schuster0:45
It actually has been a pretty good year in terms of IPO performance. It all depends how you measure it, but if you measure it over a four-year horizon, actually the IPOX strategies are actually up on the year, outperforming substantially again, the third year in a row. And these returns are driven by companies that went public in 2008, like Visa, like Philip Morris, like Laura, like M. Johnson, and obviously on the short end you had underperforming companies such as GM and so forth. But overall, it has been a pretty decent year for the US IPO market. And in particular, kind of deal flow, the deal flow is really concentrated amongst companies domiciled in the US. Investors here in the US do not want any foreign IPOs anymore. It's really the typical, traditional, good old US IPO which has been doing pretty well actually.
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Interviewer1:42
Focus for you, if you can, on technology initial public offerings. Many times we think of the IPO market as dominated by technology. What was the mix of technology IPOs?
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Joseph Schuster1:54
Well, there were a large number of technology IPOs here. Obviously, social media was the highlight. What we realized in many of these technology IPOs is they seemed to have been priced really at the top of their potential market cap right out of the gate, and you get a lot of volatility down the road. We saw Pandora down substantially, Yandex down substantially, LinkedIn, we saw Zynga down, Groupon down, and so forth. So there's been a good mix of specialty technology, but from an investment perspective, the returns really have come more or less from the boring, boring companies like GNC Nutrition, like LPL, like Nieden Holding for example.
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Interviewer2:38
What is this, what is this bode for technology initial public offerings in 2012? Has what happened to those IPOs tarnished investor appetite for more tech?
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Joseph Schuster2:51
I believe it's not tarnishing substantially. I think there's still a lot of pent-up demand for the US-domiciled deal, especially for big brands, Michael Kors type of deals. It may definitely affect the valuation of Facebook coming up for sure, because you have this big volatility in these tech IPOs where you are just not compensated for participating anymore.
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Interviewer3:18
Joseph, what about the trend in initial public offerings of not really releasing many shares for trading, and as a result that really changes the nature of the price?
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Joseph Schuster3:29
Obviously, we believe investors, especially long-term investors, should stay away from this type of IPO, especially a Groupon type of IPO, where the investment banks use the float in order to maximize initial market cap and then it's down the hill from the initial IPO price. So by investing in IPOs, it's very important to look at the float, the percentage of equity offered. The higher it is, the relatively better it is, the more fair is the market and the price for the long-run buy-and-hold investor.
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Interviewer4:01
Joseph Schuster, what about innovative ways to bring companies to the public market? For example, Google came public as a Dutch auction. Is there any possibility we'll see a revival of new and innovative ways to go public?
J
Joseph Schuster4:19
I do not believe that anything will change next year in terms of how companies will be coming to the market. Obviously, it seems that Facebook is pretty much set on a very conventional type of IPO procedure, not really surprising because some of the initial IPO investors now pre-IPO are Goldman Sachs and some of the major investment banks. So nothing new on that front, unfortunately.
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Interviewer4:41
Joseph, what about the popularity of investing in companies before their initial public offering, buying those shares in private markets?
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Joseph Schuster4:53
That has increased definitely, especially year-to-date and last year. We believe that a lot of this pre-IPO market is really one-sided, only buy interest. And I think investors in general, especially the retail population, should be very careful in investing in it. As recently as Zynga shows, there were large funds buying Zynga at a premium of 30 to 40% before it actually compared to where it is today. So it's not really a one-way street with pre-IPO prices, and especially for the larger deals there can be substantial downside risk once the respective company is actually trading in the public markets because of plenty of liquidity available.
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Interviewer5:42
I want to thank you very much, Joseph Schuster, joining us from IPOX Schuster, joining us from Chicago. Thank you.