Secondary stock offerings by U.S. companies grabbed most of the equity capital markets activity in the first quarter, spurred by a sluggish market for IPOs and private equity investors who want to sell down their stakes in newly public companies.
U.S. follow-on offerings raised $41.9 billion in the first quarter, or 82 percent of equity capital markets activity from 62.3 percent a year earlier, according to Thomson Reuters data.
IPOs, in contrast, fell to 11.3 percent of overall activity in the first quarter from 20.6 percent.
"There's a lot of money on the sidelines and the number of IPOs coming to market is not up to the demand side of the curve," said David Menlow, president of research firm IPOFinancial. "People want to deploy their money and want to be involved in something — that's what is fueling these offerings."
More follow-on offerings signal that investors are comfortable enough with stock market volatility that they're willing to place bets on equities, provided the companies have some track record in the market, bankers say.
That suggests secondary offerings may continue to outpace IPOs in the weeks ahead.
Many of the offerings come from companies with significant stakes still held by private equity firms. Some of these firms were taken private in leveraged buyouts from 2004 to 2007 and may be too large to allow private equity backers to sell significant chunks at once.
Instead, firms are choosing to sell down small portions of their investment in a portfolio company's IPO to test the waters, and then return to the public markets soon after to decrease their stakes further if the stock price remains high.
"It's often hard to do an IPO with a large component of selling shareholders because potential investors don't want to see that," said Stephen Older, a New York-based corporate attorney with McDermott Will & Emery who specializes in public offerings. "So, later on private equity backers will sell down their stakes" in secondary offerings.
Notable follow-on offerings from private equity-backed companies came from quick-service restaurant franchisor Dunkin' Brands Group Inc, TV data company Nielsen Holdings N.V. and discount retailer Dollar General Corp.
Firms where private equity investors hold a substantial stake and are expected to pursue large follow-on offerings later this year include pipeline company Kinder Morgan Inc and hospital operator HCA Holdings Inc, say bankers.
The follow-on offerings also play an important role for private equity-backed companies: allowing legacy sponsors to cash out and be replaced by new public investors.
"There's going to be a bit of a marketing effort that goes on to get more investors paying attention to the stock and broadening that investor base," said Jay Ritter, a finance professor at the University of Florida who focuses on IPO market research.
Some companies have also pursued follow-on offerings just several months after their IPOs. This move is unusual for newly public companies, which typically must adhere to a 180 day lock-up period before insiders can sell shares.
Last week, cloud computing company Guidewire Software filed for a $225 million secondary offering only two months after its IPO.
During the first quarter, luxury retailer Michael Kors Holdings Ltd launched a more than $1 billion follow-on offer three months after its successful IPO. Social gaming company Zynga Inc also held a $515.6 million secondary offering less than four months after its public market debut.
(Reporting By Olivia Oran; Editing by Alwyn Scott; Editing by Michael Perry)