Year-End Review

Building on the momentum from 2013, and boosted by a strong performance from life sciences and venture capital–backed companies, the 2014 IPO market produced 244 IPOs. The year's total was the highest annual figure since 2000 and almost one-third higher than the annual average of 186 IPOs recorded between 2004 and 2007—the last period of sustained offering activity. The number of IPOs has seen a steady annual increase in all but one of the past six years, and the last seven quarters have each produced 50 or more IPOs—a level of consistently high activity not seen since 2000. 

Gross proceeds for 2014 were $74.4 billion, an 80% increase over the $41.3 billion in gross proceeds in 2013 and more than double the $30.8 billion average annual figure over the 12-year period from 2001 to 2012. The 2014 figure is the third-highest yearly figure ever, trailing only the gross proceeds of $94.8 billion in 1999 and $108.1 billion in 2000. 

There were nine billion-dollar IPOs in 2014, more than double the average of four billion-dollar IPOs per year that prevailed for the preceding 12 years. The largest IPO of the year—also the largest in history—was Alibaba's $21.77 billion offering. The next four largest offerings in 2014 came from financial institutions, led by Citizens Financial Group ($3.01 billion) and Synchrony Financial ($2.88 billion). 

Emerging growth companies (EGCs) continued to dominate the IPO market in 2014. EGCs accounted for 85% of the year's IPOs, compared to 82% in 2013 and 76% in the portion of 2012 that followed enactment of the JOBS Act. 

The median IPO offering size declined 11%, from $107.4 million in 2013 to $96.0 million in 2014, representing the lowest yearly figure since the $89.3 million median offering size in 2004. Among EGCs, the median IPO offering size in 2014 was $86.7 million—less than one-fifth of the $446.7 million median offering size for all other IPO companies. 

The median offering size for life sciences IPOs declined from $68.6 million in 2013 to $59.0 million in 2014. While the median offering size for non-life sciences IPO companies also declined, from $187.0 million in 2013 to $126.2 million in 2014, the 2014 figure was largely in line with the $124.3 million annual median deal size for non-life sciences IPO companies for the five-year period preceding 2013. 

The average 2014 IPO gained 14% from its offering price on its first trading day—down from the 21% gain for all IPOs in 2013, but still the fourth-highest annual figure since 2000. 

There were seven "moonshots" (IPOs that double in price on their opening day) in 2014—up from six moonshots in 2013. Only one of the seven moonshots, however, appreciated further over the remainder of the year. Ultragenyx Pharmaceutical eked out a 3% gain, while the other six saw an average decline of 40% from first-day close through year-end. 

In 2014, 27% of all IPOs were "broken" (IPOs whose stock closes below the offering price on their first day), compared to 22% in 2013. 

The average 2014 IPO company ended the year 24% above its offering price, topping the annual gains in the major market indices but falling well short of the 47% figure for all IPOs in 2013. Aftermarket gains were more modest, with the average 2014 IPO gaining only 9% from its first-day closing price through year-end. As of December 31, one-quarter of all 2014 IPOs were trading at least 50% above their offering price, while 38% were trading below their offering price, and 44% were trading below their first-day close. 

The 10 best-performing IPOs of 2014 came from six life sciences and four tech companies, all venture-backed. The year's best performer was Radius Health, which was trading 386% above its offering price at year-end, followed by Auspex Pharmaceuticals (up 337%), Kite Pharma (up 239%) and TubeMogul (up 222%). 

With life sciences company IPOs accounting for an increasing share of the overall IPO market—14% in 2012, 28% in 2013 and 40% in 2014—median annual revenue and profitability measures for IPO companies have plunged. The median annual revenue for IPO companies fell by one-third between 2012 and 2013, from $133.6 million to $89.9 million, and plummeted a further 24%, to $68.2 million, in 2014—the lowest level since 2000. The percentage of profitable IPO companies declined from 55% in 2012 to 43% in 2013, and to 36% in 2014. 

Among all life sciences IPO companies in 2014, median revenue was just $1.2 million, and only 13% were profitable. Excluding life sciences companies, median annual revenue of EGC IPO companies declined by only 5% between 2012 and 2013, from $120.6 million to $114.5 million, and then fell a further 8%, to $105.4 million, in 2014. The percentage of profitable non-life sciences EGC IPO companies slipped from 49% in 2013 to 46% in 2014. 

The median annual revenue for non-EGC IPO companies declined by 9%, from $2.54 billion in 2013 to $2.32 billion in 2014. The percentage of profitable non-EGC IPO companies decreased from 75% in 2013 to 61% in 2014. 

Individual components of the IPO market fared as follows in 2014: 

• VC-Backed IPOs: The number of IPOs by venture capital–backed US issuers increased 42%, from 72 in 2013 to 102 in 2014. VC-backed IPOs accounted for 56% of all US issuer IPOs in 2014. The median offering size for US venture–backed IPOs declined 3%, from $77.3 million in 2013 to $75.0 million in 2014—the lowest yearly figure since the $71.0 million median offering size in 2006. The median deal size for non-VC–backed companies in 2014 was $150.0 million. The average 2014 US issuer VC-backed IPO gained 32% from its offering price through year-end.
• PE-Backed IPOs: Private equity–backed IPOs by US issuers declined 6%, from 48 in 2013 to 45 in 2014. PE-backed issuers accounted for one-quarter of all US-issuer IPOs in 2014, down from 34% in 2013. The median deal size for PE-backed IPOs in 2014 was $231.5 million—almost triple the $81.2 million deal size for all other IPOs. The average PE-backed IPO in 2014 gained 16% from its offering price through year-end.
• Life Sciences IPOs: Life sciences companies captured 40% of the US IPO market in 2014, with 98 IPOs—almost double the 50 IPOs from this sector in 2013, a figure itself 16% higher than the annual average of 43 life sciences IPOs that prevailed in the three-year period between 2010 and 2012. The average 2014 life sciences IPO company ended the year 35% above its offering price, and 62% of the year's crop were trading above their offering price at year-end.
• Tech IPOs: Deal flow in the technology sector remained strong in 2014. Tech-related companies (excluding life sciences companies) produced 69 IPOs, the largest number since 2000. However, the tech sector's share of the US IPO market fell to 28% in 2014, down from the average of 40% in the preceding five years, due to the large influx of life sciences company IPOs. Aftermarket performance of tech IPOs was about on par with the rest of the market in 2014, with an average gain through year-end of 24%, compared to the average gain of 23% for non-tech IPOs.
• Foreign Issuer IPOs: The number of US IPOs by foreign issuers climbed from 36 in 2013 (20% of the market) to 60 in 2014 (25% of the market)—eclipsing the 56 in 2007, which had represented the high-water mark for foreign issuer IPOs since 2000. The number of US IPOs by Chinese issuers increased by 75%, from eight in 2013 to 14 in 2014. Israeli companies were the next most prevalent among foreign issuers, with 12 IPOs in 2014, more than double the five Israeli issuer IPOs in 2013, followed by UK issuers with six IPOs in 2014 compared to three in 2013. Aftermarket performance for foreign issuer IPOs in 2014 was, however, essentially flat. The average foreign issuer IPO company produced a gain of only 1% from its offering price through year-end.

In 2014, 94 companies based in the western United States (west of the Mississippi River) completed IPOs. Eastern US–based issuers accounted for 90 IPOs, and foreign issuers accounted for the remaining 60 IPOs. California led the state rankings with 54 IPOs, followed by Massachusetts (with 23 IPOs), Texas (with 20 IPOs) and New York (with 10 IPOs).

December IPO Activity

The December IPO market produced 13 IPOs, with gross proceeds of $2.78 billion. IPO activity in December consisted of offerings by the following companies listed in the order they came to market:

• LendingClub, the world's largest online marketplace connecting borrowers and investors, priced above an upwardly revised price range and ended its first trading day with a gain of 56%.
• Momo, a mobile-based social networking platform enabling users to establish and expand social relationships based on location and interests, priced at the midpoint of the range and produced a first-day gain of 26%.
• Avolon Holdings, a leading global aircraft leasing company focused on acquiring, managing and selling commercial aircraft, priced below the range and ended its first day of trading down 8% from its offering price.
• Connecture, a leading web-based consumer shopping, enrollment and retention platform for health insurance distribution, priced below the range and produced a first-day gain of 10%.
• Hortonworks, a provider of a Hadoop-based data management solution that enables its customers to harness the power of big data to transform their businesses through more effective and efficient management of their valuable data assets, priced an IPO upsized by 4% above the range and climbed 65% from its offering price in first-day trading.
• James River Group Holdings, a Bermuda-based insurance holding company, priced below the range and ended its first trading day with a 1% gain.
• Metaldyne Performance Group, a leading provider of highly engineered components for use in powertrain and safety-critical platforms for the global light, commercial and industrial vehicle markets, priced an IPO downsized by 35% below the range and eked out a first-day gain of less than 1%.
• New Relic, a provider of a cloud-based suite of products that enables organizations to collect, store, and analyze massive amounts of software data in real time, priced above the range and produced a first-day gain of 48%.
• Workiva, a provider of a cloud-based and mobile-enabled platform for enterprises to collaboratively collect, manage, report and analyze critical business data in real time, priced in the middle of the range and declined 2% on its first trading day.
• On Deck Capital, a leading online platform for small business lending, priced above the range and ended its first trading day up 40% from its offering price.
• Bellicum Pharmaceuticals, a clinical stage biopharmaceutical company focused on discovering and developing novel cellular immunotherapies for various forms of cancer, including both hematological cancers and solid tumors, as well as orphan inherited blood disorders, priced an IPO upsized by 18% above the range and produced a first-day gain of 26%.
• Juno Therapeutics, which is building a fully integrated biopharmaceutical company focused on revolutionizing medicine by re-engaging the body's immune system to treat cancer, priced an IPO upsized by 19% above an upwardly revised price range and ended its first day of trading with a gain of 46%.

Outlook

IPO market activity in the coming year will depend on a number of factors, including the following:

• Economic Growth: While the US economy has seen improvements in a number of key metrics, including job creation and an increase in household purchasing power due to declining energy prices, wage growth remains modest and the workforce participation rate—the labor force as a percentage of the whole population—is at its lowest level since 1978. Moreover, after more than six years with interest rates at historic lows, recent Fed statements raise the specter of a hike in interest rates later this year. Sustained economic growth will be key if the IPO market is to maintain or increase the pace that prevailed in 2014.
• Capital Market Conditions: Stable and robust capital markets remain a precursor to IPO activity. The major US indices posted impressive annual gains once again in 2014, with the Dow Jones Industrial Average, Nasdaq Composite Index and S&P 500 increasing 7.5%, 13.4% and 11.4%, respectively. On the heels of very strong gains in each of the past three years, similar gains may not be realistic in 2015, but a reduction in the market volatility that has periodically stalled IPO deal flow in recent years would help the market.
• Venture Capital Pipeline: Venture capitalists depend on IPOs—along with company sales—to provide liquidity to their investors. There has been a resurgence in VC-backed IPOs over the last five years, including IPOs by a number of high-profile companies, and the pool of attractive VC-backed IPO candidates remains large. Although venture capital investors often prefer a sale over an IPO because a sale usually can be completed faster and with greater certainty than an IPO, the outsized valuations that can be achieved in the public market may be shifting the sale/IPO pendulum back toward IPO exits for the most valuable VC-backed companies.
• PrivateEquity Impact: Private equity investors seek to divest portfolio companies or achieve liquidity through IPOs. With private equity firms holding near-record levels of "dry powder" (unspent capital that investors have committed to provide), and general partners facing deadlines as the investment window starts to close on funds raised in 2007 and 2008, private equity sponsors can be expected to continue to pursue IPOs aggressively in 2015.
• Impact of JOBS Act: Enacted with great fanfare in April 2012, the JOBS Act is intended to improve access to the public capital markets for EGCs. The vast majority of all IPO candidates can qualify as EGCs, but the extent to which the JOBS Act is responsible for the increase in the number of IPOs over the past two years is unclear. In any event, the confidential submission provisions of the act and the significant increase in the maximum number of stockholders that a private company may have without registering as a public company has given emerging companies more flexibility in timing their IPOs.

IPO activity has remained brisk in early 2015, with 19 IPOs in January compared to 16 in January of 2014.