MN Investors Less Optimistic Of IPO Growth Than U.S. Peers

The national investment community expects an uptick in initial public offerings, mergers, and acquisitions in the second half of 2013, although Minnesota investors are less confident.

The majority of venture capitalists, investors, entrepreneurs, and professional advisors who were recently polled by KPMG expect initial public offerings (IPOs) to increase throughout the second half of 2013—but fewer than half of the Minneapolis respondents shared that optimism.

Netherlands-based audit, tax, and advisory firm KPMG polled more than 900 members of the venture capital community during its semi-annual “IPO webcast.” More than 60 percent of respondents said they believe IPO activity will increase during the rest of 2013.
KPMG, which has an office in Minneapolis, said investors are hungry for new public offerings given the returns they saw on recent IPOs.
“We saw strong momentum in the IPO market in the first half of 2013 as a result of the overall performance of the broader market, the economic outlook, and desire for firms to monetize their investments,” Brian Hughes, a KPMG partner, said in a statement. “The diverse range of industries in the IPO pipeline, coupled with strong investor appetite, bodes well for the IPO market for the remainder of the year.”

The participants from Minneapolis, however, were less confident. Of those that answered from Minneapolis, only 46 percent thought IPO activity would increase in 2013.
“The tone regarding IPOs is definitely less rosy and optimistic in Minnesota versus the coasts, like Boston and Silicon Valley,” Kevin Smith, a tax partner in the Minneapolis office for KPMG, told Twin Cities Business.
Smith said the biggest reason for the dichotomy is the difference in industries. A large portion of Minnesota’s private businesses are in the med-tech industry, whereas places like California are booming with tech companies. 
“There are just a lot more headwinds for medical device companies to go public,” Smith said. “They have to deal with things like FDA regulations and medical device excise taxes, so the funding just isn’t there to help them enter the IPO pipeline.”
When asked which industries would experience the largest increase in IPO activity, respondents most frequently cited technology (40 percent), followed by health care and life sciences (25 percent), energy (14 percent), consumer markets (11 percent), financial services (9 percent), and industrials (3 percent).
The Minneapolis respondents generally agreed with the group as a whole, as to which industries will experience the most IPO growth, although they were much more confident in the tech industry (58 percent), slightly less confident in the health care and life sciences industry (23 percent) and no local respondents cited the energy industry.
“Even though Minnesota is less confident, IPO activity is expected to increase across the nation and we will be seeing that in Minnesota as well,” Smith said. “Although I believe the IPO activity in Minnesota will be in established businesses in the food and beverages industry or the clean tech industry.”
According to the KPMG poll, respondents believe these will be the main motivators for companies filing for an IPO in 2013: raising capital for organic growth (25 percent of respondents), raising capital for acquisitions (17 percent), increasing liquidity (14 percent), and repaying debt (9 percent).
Smith said many entrepreneurs in Minnesota are choosing to sell their company rather than go public. “The whole process is just so much easier that it’s become hard for start-ups to resist just selling,” Smith said.
Minnesota IPOs have been scarce in recent years. In May, Plymouth-based biotech company BioAmber became the first company to complete an IPO in 2013. Before that, only two locally based companies completed traditional IPOs in 2012: Maple Plain-based Proto Labs began trading on the New York Stock Exchange and Eden Prairie-based medical device firm Osprey Medical went public through an IPO in Australia. 
In 2011, two Minnesota companies completed IPOs: Plymouth-based Kips Bay Medical raised $16.5 million in February of that year, and Tornier, an Amsterdam-based medical device company whose U.S. headquarters are in Edina, raised $166 million in an IPO the same month. Eden Prairie-based Bluestem Brands also filed to go public in 2011, looking to raise about $150 million, but later postponed for undisclosed reasons.
The two Minnesota IPOs completed in 2011 and 2012 matched the number completed in 2010 and outpaced 2009, when there was only one, and 2008, when there were none. 
The KPMG webcast also asked participants about future merger and acquisition activity. Forty-two percent of respondents expect that their own organization will be involved in a merger or acquisition in the remaining half of 2013. Nineteen percent of respondents said their companies would be involved as a buyer, 12 percent as a seller, and 11 percent involved as a buyer and seller.
Almost 65 percent of respondents believe that early and expansion-stage companies are the most promising for investment, start-up (15 percent), and later-stage (14 percent).
“Abundance of available capital as a result of conservative spending in recent years, both on the strategic buyer side as well as the private equity side, continues to drive mergers and acquisition activity,” JP Ditty, a managing director in KPMG’s corporate finance sector, said in a statement.
While quiet on the IPO front, Minnesota med-tech companies have been involved in mergers and acquisitions quite frequently recently, both as buyers and sellers. For example, medical device giant C. R. Bard, based in New Jersey, has bought two Minnesota-based med-tech companies just in the last couple months, and another in 2011.
“Minnesota med-tech companies seem to always be on the lookout for mergers or acquisitions,” Smith said. “And that will continue going forward.”