Predictive Analytics on IPOs

Posted: 23rd February 2010
Predictive Analytics on IPOs

What can we extrapolate from predicted IPO activity? In this blog entry we will discuss that - as well as explore some examples right in Recorded Future - as well as provide some links to Futures (our very cool alert functionality) that you can subscribe too by just clicking them (you'll find them at the bottom of the page).

Highly anticipated initial public offerings can generate incredible buzz and excitement within the investing community. With Recorded Future, we can track not only scheduled IPOs but rumored IPOs as well. Bankers might be interested in the rumor mill to know what deals competing banks have in the pipeline. Companies (and their shareholders for that matter) may want to know if competing firms are planning share offerings. Investors might study the trend in IPO activity to speculate about the health of the markets.

Since it is difficult for an investor to directly monetize the knowledge of a specific upcoming IPO, we will focus on what light the level of overall IPO activity can shed on the condition of financial markets. Between SEC filings and all of the speculation and rumors that are reported in blogs and by the media, there is plenty of information available to create an accurate forecast of upcoming IPO activity. With the help of Recorded Future’s database and visual outputs, we can easily identify expected periods of increased IPO activity in the overall market, as well as within specific sectors or geographic regions.

IPO activity and the market

The level of IPO activity tends to move in step with the strength of the market. This correlation means that investors can use IPOs, like other corporate actions (see M&A as Indicator of Economy Turn Around and Novel Economic Indicators), to gauge the health of equity markets. Booming markets are typically accompanied by an increase in IPOs, while IPO activity can come to a standstill in the worst of bear markets as we saw in the U.S. during the first quarter of 2009.

Since IPO activity is a direct result of market strength, there is a lag between the time the market turns and the time IPO activity increases. The lag exists for two reasons: a) companies try to time their IPOs to maximize valuations by waiting for strong market conditions, and b) investors are more willing to take on the risk that IPOs entail when the markets are healthy. Because of this lag, clues to the timing of upcoming IPOs typically don’t appear until after the market starts to move. At this point, it is too late to utilize predicted IPO activity to capitalize on the strength of the market. But there are other ways to take advantage of this knowledge.

Putting RF to use

Although increases in IPO activity typically trail movement in the market during an upswing, the IPO space is often the first area to show market weakness. IPO activity will taper off as investors grow adverse to risk and become increasingly skeptical of unproven stocks. Therefore, a dearth of predicted IPO activity during an otherwise seemingly good time in the market may indicate upcoming weakness.

We pose the query IPO 2010 and get the following results. Double click and drag the visualization! Mouse over the objects!

Users can also monitor the progress and status of upcoming IPOs. Comparing the level of actual IPO activity [or lack thereof] to the rate of increase/decrease in predicted IPO activity can signal a trend in the market. A strong market has consistent IPO activity and a lengthening pipeline.

Another use for Recorded Future’s predicted IPO events is to form judgments about the current health of the market based on what RF predicted for ‘now’. If three months ago RF foresaw limited IPO activity but the deals are flying out the door now, we can use this knowledge to supplement our analysis when we produce an investing strategy for the current environment.

A look at 2010

The media is already speculating that 2010 will see big name IPOs like Facebook, Zipcar, KKR and/or Apollo Global Management.

News about General Motors was all about bankruptcy, now actually the next step is an initial public offering - which we can easily explore with the query IPO General Motors 2010:

But as we noted before, it is hard to put this information to work. While knowledge of the upcoming Visa IPO may have allowed some investors to profit by trading MasterCard in early 2008, we would not be utilizing Recorded Future to the fullest by simply searching for IPO timing – there are SEC filings, financial services and Google searches to tell us when a specific company is set to go public. Instead we want to focus on the overall trend in IPO activity.

Given the market’s strong performance since March 2009, it is no surprise that there is IPO activity lined up for 2010. But one area of possible concern is the financial sector. Considering its strong performance in the latter stages of 2009, there is not a long line of financial service firms knocking at the door. While the aforementioned private equity giants KKR and Apollo may tap the public coffers this year, it is important to keep in mind that the cream of the IPO crop can complete deals in just about any market.

There are some financial firms waiting in the wings such as Imperial Capital (U.S.), Samsung Life (South Korea), Punjab and Sind Bank (India) and Fideuram (Italy), but it is a small amount of predicted IPO activity given the recovery in the sector.

Final Thoughts

RF’s predicted IPO activity can lead to a lot of speculation about the overall market because of the relationship between IPO activity and market strength. While we surmise that the financial sector may soften based on a lack of predicted IPO activity, the future remains unknown. Well maybe there is one thing we know for certain…there is going to be one heck of a media field day if/when Facebook files for an IPO.

As IPOs are taking off in 2010 (we think!) you may want to stay tuned through these Futures that will be delivered through email (enter your email address after clicking any of the links below):

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Finally - remember that we're always very interested in your feedback - leave any comments below!

Want to leverage such queries using our news analytics? Learn more about how Recorded Future works or request a live demo of the service itself.