Author William Cohan, who wrote House of Cards and Money and Power, is currently promoting his latest book, Why Wall Street Matters. As part of the book’s promotion he’s put out an article adapted from his new book telling all of us why we should appreciate Wall Street and what it does for the U.S. economy.
That’s rich coming from a guy who did mergers & acquisitions work on Wall Street for so many years but let’s assume he’s on the level for a moment and really wants us to care.
Should we?
Cohan uses the Apple Inc. (NASDAQ:AAPL) IPO from 1980 as his defense of Wall Street — after all, without the Wall Street bankers taking the future maker of iPhones public, there might not be an iPhone.
OK, Cohan doesn’t really make that assertion, but he does argue that the basic job of Wall Street is to raise capital for growing businesses through the initial public offering, and without the IPO, the world would be a duller place.
Perhaps in some romantic notion from bygone days that’s true, but the IPO, today, exists primarily to allow early investors to cash in their chips.
Take Snap Inc (NYSE:SNAP) for example.
Its recent IPO raised gross proceeds of $3.4 billion dollars but almost $1 billion of that went to selling shareholders instead of the company. Given the lock-up period expires in 150 days from the date of the prospectus (March 1), why not let the company keep the entire $3.4 billion (which it’s going to need if it ever wants to make a profit) in the true spirit of Wall Street?
There’s a right way to do an IPO and there’s a wrong way. Here are seven recent IPOs that have done it the right way.
IPOs That Worked: Invitation Homes (INVH)
Without knowing anything about this business, one would probably guess that it’s a homebuilder. In fact, Invitation Homes Inc (NYSE:INVH) is one of the largest owners of single-family homes for lease in the country with almost 50,000 to rent primarily in Florida and California.
INVH got its start in 2012 when alternative asset manager Blackstone Group LP (NYSE:BX) decided to invest in single-family homes that it could rent to people who might have been homeowners before the 2008 economic crisis and wanted a good place to live.
Not unlike investing in any other type of real estate, Invitation Homes has turned the house rental business into a well-oiled machine. In 2015, it generated $114.4 million in net income from $800.2 million in revenue.
The best part about this IPO?
The entire $1.8 billion went to the company, not Blackstone, to repay a number of loans outstanding with varied interest rates between 2.2% and 3.5%.
Blackstone owned 73% of the business before the IPO and they own a similar amount after. Eventually, it will exit its control position but to me this is the way an IPO should be done — no selling shareholders.
IPOs That Worked: Laureate Education (LAUR)
A public company until being taken private in 2007, Laureate Education Inc (NASDAQ:LAUR) returned to the public markets in January pricing its IPO shares at $14, well below the $17-$20 range it had set for its offering. However, it upped the number of shares sold to 35 million, so the ultimate haul after underwriting fees but before its own expenses was $465.5 million or slightly less than it originally planned to raise.
Investors have panned Laureate’s IPO, which has been in the works since 2015, sending its stock down 8.6% since Feb. 1.
Once known as Sylvan Learning, Laureate specializes in higher education, with 71 degree-granting institutions in 25 countries around the world generating over 50% of its revenue from Latin America. In the latest 12 months ended Sept. 30, 2016, it generated adjusted EBITDA of $708.3 million from $4.2 billion in revenue.
With $3.9 billion in debt, its private equity owners did the right thing by not selling any shares in the offering. Private education might have a bad name but Latin America is a growth market for sure.
I wouldn’t put my retirement money in LAUR stock, but at least they did the IPO the right way.
IPOs That Worked: REV Group (REVG)
Niche businesses make great IPOs because they’re different. It seems every second IPO is a tech or biotech company, but rarely do you get a meat-and-potatoes offering like REV Group Inc (NYSE:REVG) who specialize in manufacturing fire trucks, ambulances, transit buses and motorhomes. It’s not glamorous, but it pays the bills.
REVG had a price range of $19-$21 but went out the gate above the range at $22, selling 12.5 million shares for net proceeds after underwriting fees and expenses of $256.8 million. It plans to use $192.1 million of the funds to pay of a fixed-rate 8.5% loan and the rest to pay down most of its ABL facility.
The fact that it priced above its range helped REVG stock come out fast; it’s now up 19.6% from its IPO price. With a good first quarter in the books as a public company, its stock should continue to move higher.
What I liked most about its IPO is that it provided existing shareholders with a small sliver of shares to sell through the underwriter over-allotment. In other words, if we do well, you’ll do well.
IPOs That Worked: Hamilton Lane (HLNE)
While it sounds like a law firm or a WASPish clothing line, Hamilton Lane Inc (NASDAQ:HLNE) is actually a small-cap version of Blackstone. It specializes in private capital markets which have become the preferred investment vehicle for high-net-worth investors. Managing $40 billion in assets with another $292 billion in assets under administration, Hamilton Lane has grown its AUM by 12% annually over the last four years.
The Feb. 28 IPO was priced at its mid-point of $16; HLNE stock is up 19.3%.
Hamilton Lane Inc. is the holding company. It will use its net proceeds of $203 million to essentially buy a 31.4% economic interest in Hamilton Lane Advisors, LLC, the operating company whose 290 employees are tasked with continuing to grow its alternative asset management business. In addition, it will use what’s left over to repay a portion of the operating company’s debt.
Normally, I wouldn’t like this type of IPO, but in order to transform the business from what is essentially a partnership into a real company, this is the best way to go about it.
At the end of the day, HLA has good growth potential with excellent profitability. If you believe in private capital markets, as I do, HLNE is a good stock to own.
IPOs That Worked: Jounce Therapeutics (JNCE)
This is the prototypical IPO we’ve become accustomed to in recent years — the biotech hopeful that has got Big Pharma in its back pocket until it can get a product launched that’s a commercial success generating real revenue.
Jounce Therapeutics Inc (NASDAQ:JNCE) is developing cancer therapies that enable the immune system to attack tumors turning the tables on these deadly masses. It’s doing so in collaboration with Celgene Corporation (NASDAQ:CELG), a $99 billion market cap with $11.2 billion in revenue.
Celgene gave Jounce a $225 million upfront payment, invested $36.1 million in its equity and has exclusive commercial rights to its lead product, JTX-2011. On its balance sheet, $208.1 million shows up as deferred revenue; the rest is collaboration revenue. Other than that it doesn’t generate any sales and probably won’t for some time.
Jounce raised net proceeds of $108.9 million from its Jan. 26 IPO including the exercise of its over-allotment at $16 per share, $1 higher than the top of its price range. Always a good sign, its stock is up 32.6%.
It plans to use $30 million for advancing JTX-2011 including the completion of its Phase IV clinical trial. Another $25 million to get JTX-4014 into clinical trials; $10 million for additional research and development and the remainder for hiring new staff and general operating expenses.
The best part of this IPO is that Jounce has enough cash to operate for 24 months. While I’m not a fan of money-losing IPOs, I could really get behind its plans to help conquer cancer.
IPOs That Worked: New Age Beverages (NBEV)
Could this be the next Monster Beverage Corporation (NASDAQ:MNST), one of the best growth stocks of the last 50 years? Who knows but that’s what makes this kind of IPO so exciting.
A small deal by IPO standards, Colorado-based New Age Beverages Corp (NASDAQ:NBEV) came to market February 13 at $3.50 per share, raising net proceeds of $15.7 million including the exercise of its over-allotment by underwriters; it’s up 20%.
It has got a convoluted history that I won’t delve into, but at the end of the day, here’s what I like about New Age and its IPO.
First of all, it has two healthy functional beverage brands to sell to consumers — Xing Tea and Búcha Live Kombucha — and more than $50 million and $3 million in revenue and EBITDA respectively. Its CEO, Brent Willis, has a good track record of growing consumer-related businesses including two years at Cott Corporation (NYSE:COT), one of the world’s largest private-label carbonated soft drinks businesses.
Most importantly, it has got some really nice packaging, and while that might sound superficial, you can have the best-tasting product in the world but if it doesn’t stand out on the shelves, it soon will be off the shelves.
The first $4.5 million raised goes to repaying a promissory note involved in the merger between the owners of Xing Tea and Búcha Live Kombucha with the rest for growing revenues.
Make no mistake, this is a risky investment, but one speculative investors should take a look it more closely.
IPOs That Worked: Innovative Industrial Properties (IIPR)
This final IPO is another risky proposition but more along the lines of what I believe the IPO market is all about — providing capital to companies ready to grow.
In this case, some real estate veterans have come together to create Innovative Industrial Properties Inc (NYSE:IIPR), a blind pool with no business operations, formed specifically to buy industrial properties with triple-net leases geared to the medical marijuana market.
Raising a total of $67 million in gross proceeds at $20 per share from its Nov. 30, 2016, IPO, it announced in December that it was buying its first property, a 127,000 medical use cannabis cultivation and processing facility in New York state for $30 million from PharmaCann LLC, in a sale-leaseback transaction that will see it generate annualized rent of $5.2 million or 17.2% of the purchase price.
The New York property represents 49% of its $60.8 million in net proceeds from its IPO. It will invest the remaining funds in similar properties specifically suited to growing medical marijuana.
There are three reasons why I like this IPO.
First, the potential growth of IIPR stock is tremendous given what’s happening in the cannabis industry. Secondly, the chairman of the company is Alan Gold, a 30-year real estate veteran who co-founded two NYSE-listed REITs. If he’s involved, at least it has got a chance of survival. Lastly, if it can get the same lease terms on its remaining investments, the yield on this REIT will be excellent.
A lot of risk, but if you believe in the long-term viability of the cannabis industry, this type of investment vehicle makes a heck of a lot of sense.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
