Forbes guest contributor Jackie Kelley runs Ernst & Young’s Americas IPO Network, using her advisory role to help entrepreneurial companies go public. So when she writes about the capital markets and what it takes to become a successful public company, I pay attention.
Recently, Kelley discussed the 6 Tips For Hitting An IPO Home Run. Although targeted at entrepreneurs, her fifth point — “Use your IPO proceeds for growth” — is very relevant for investors. Far too often I see IPOs that do little for the company going public, but a great deal for exiting initial investors.
Think private equity.
That’s not what IPOs were intended for. Kelley reminds us in her article that IPOs are supposed to provide growing companies with the funds necessary to make acquisitions and other capital allocation decisions that will take them to the next level.
Do you know any IPOs like that? There are very few companies going public these days that use 100% of the net proceeds for corporate purposes. I’m not talking about repaying debt that was used to make a last-minute dividend recapitalization or to compensate a private equity sponsor for the loss of a very lucrative, self-serving advisory contract. No, I’m talking about specific investments that make a difference. They’re very rare.
When I consider investing in an IPO, I look for five things:
- There are no selling shareholders.
- There have been no dividend recaps.
- The “use of proceeds” section is crystal clear about where the money will go.
- The firm’s total debt is 50% or less of its total assets.
- The company is making money or will be within the year.
With this checklist in tow, I’ve found three IPOs that fit the bill in 2013.
Biotech Darling
I won’t pretend to be a science geek, but Epizyme (EPZM) hit a home run May 30 when the Boston-based company sold 5.9 million shares of its stock at $15 each. Epizyme specializes in the development and commercialization of drugs to treat genetically defined cancers. Its Big Pharma partners include Celgene (CELG), GlaxoSmithKline (GSK) and Eisai (ESALY).
While there were no dividend recaps, 62 million preferred shares were converted prior to the IPO into 20.6 million common shares, with four venture capital firms owning the lion’s share — none of whom were selling into the IPO.
As for its use of proceeds, $15 million of the $80 million raised will go to the clinical development of EPZ-6438, another $30 million for research and development and the remaining $35 million for general corporate purposes. It’s pretty straightforward.
Everything about its IPO looked good. Even its operating loss for fiscal 2012, which ended Dec. 31, was only $768,000. It did take a step back in the first six months of 2013 losing $9.7 million compared to a loss of $676,000 in the same period in 2012, but I chalk that up to revved-up R&D. Full-year profitability is just around the corner.
Since its IPO, Epizyme stock is up 111%.
Bon Voyage
It’s not your typical IPO, but cruise ships are expensive to build. Norwegian Cruise Line Holdings (NCLH), the world’s third-largest cruise operator, went public in January, issuing 204 million shares of its stock at $19 to raise $478 million.
All of that went to debt repayment. NCLH’s debt represented 53% of its total assets prior to IPO. With the repayment of almost $500 million in debt, the figure drops to 46% of total assets.
With its “Freestyle Cruising” option becoming very popular with the traveling consumer, Norwegian has been able to deliver consistent revenue growth in a very difficult environment. Since 2008, it has delivered a 1,530-basis-point improvement in its operating margin. In the second quarter, it launched the Norwegian Breakaway, a 4,000-passenger ship based in New York City, of all places. Net revenue in Q2 increased 12% thanks to the new ship and adjusted net income grew a whopping 67% to $60.2 million. The cruise business is very competitive, but NCLH does it very well.
Since its IPO, Norwegian’s stock is up 65%.
Bye Bye, Orange
My third pick, ING US (VOYA), technically doesn’t fit the bill because there is a selling stockholder. However, there’s a catch: ING Groep (ING) — the U.S. division’s Dutch parent — was required by the Dutch government as part of its aid package in 2008 to sell its insurance and investment management businesses. The timeline called for a 25% divestment in 2013, another 25% by the end of 2014, and the remaining 50% by the end of 2016. As a result, an IPO was its only real option.
In May, ING US went public at $19.50 per share. ING US — which will be rebranded Voya Financial in 2014 — sold 30.8 million shares raising net proceeds of $578 million. The remaining 44.2 million shares were sold by ING Groep. Without getting into details (check out pages 67-69 of its prospectus for more information), it used the entire proceeds as part of a larger plan to properly capitalize its U.S. business. The $578 million went into a $4.3 billion pot to get the business ready to operate as an independent company.
I personally like Voya because it manages one of the best investment vehicles ever sold — the ING Corporate Leaders Trust Series B (LEXCX) — which has a record like no other. This company’s future looks strong.
Since its IPO, ING US is up 45%.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
