By Emma Trincal
December 27, 2007

GREENWICH, Conn. (HedgeWorld.com)—U.S. initial public offerings this year had their biggest year since 2000 in terms of the number of deals and average dollar size, but in terms of performance, the U.S. market lagged China and was sluggish compared with the past four years, according to a report by Renaissance Capital LLC, an IPO research firm based in Greenwich.

In 2007, there were 231 IPO transactions in the United States, with an average size of $230 million, versus 198 deals in 2006 averaging $217 million in size. In 2000, there were 406 deals averaging $240 million. Deal volume in 2007 was up 16%, and proceeds raised increased 23% over 2006.

According to the report, the idea that London and Hong Kong have been stealing the New York IPO market’s shares may be an exaggeration. In reality, the U.S. market has been strong this year. Fast-growing Chinese companies in search of U.S. capital and hot U.S. technology companies have driven this trend, the report’s authors noted.

However, it is true that U.S. IPO performance was lackluster when compared to Asian deals, particularly in China. While strong in volume, the U.S. market produced depressed value IPOs, in particular in the financial sector where performance was the worst.

The largest issuers in 2007 were financial firms—for the most part alternative investment firms—and they had disappointing debuts. This was especially true for a trio of large alternative investment managers that floated their shares on the New York Stock Exchange, grabbing the public’s attention but disappointing many investors.

In February, Fortress Investment Group LLC went public in a $35 per share IPO. The private equity and hedge fund firm has since lost about 55% of its share value.

In June, The Blackstone Group LP, the largest of all the U.S. IPOs this year, raised $4.1 billion in a $31 per-share offering. Now the stock is down 25% from its IPO price.

Finally, Och-Ziff Capital Management Group LLC, the fourth-largest U.S. deal at $1.2 billion, has since it went public in mid-November seen its stock price tumble by 15%.

Although Blackstone and Och-Ziff ranked among the four largest U.S. IPO deals in terms of size, they were some of the worst performers. “The trio [of hedge fund IPOs] enjoyed much pre-pricing PR,” the Renaissance analysts wrote in their research note. “But fears about the credit quality of the underlying portfolio quickly torpedoed returns.”

As a whole, average total return for U.S. IPOs fell below returns posted from 2003 to 2006. During that period, the average annual return was 26.5%, versus 9% in 2007, according to Renaissance. This poor performance reflects the two major disruptions during the year: first, the dip in Asian stock prices in the spring, and then the fallout from the subprime crisis in the summer and early fall.

So, if the U.S. IPO market remained strong in volume, investors may be well-advised to seek returns in other corners of the world, according to Renaissance. China is where one can find the majority of the top-performing IPOs. Two of the top-five performers this past year were China-based IPOs. JA Solar Holdings, a manufacturer of high-performance solar cells, gained 376% since it went public Feb. 6; and Yingli Green Energy, a photovoltaic manufacturer, posted a 222% return since its issuance on June 7.

All told, half of the top-25 performing IPOs were China-based, according to Renaissance. There were 34 Chinese IPOs in 2007—nearly four times as many as in 2006—and eight of them gained more than 100% from their offer price.

Renaissance pointed to the emergence of Hong Kong and Shanghai as IPO hubs, as many Chinese companies turned to those stock exchanges. The most anticipated IPO of the year, that of online marketplace Alibaba.com, floated its shares in Hong Kong in early November and saw the price pop 193% on the first day of trading.

Overall, investing in IPOs this year was a good bet. The Renaissance IPO Index, launched in September was up 15%, outperforming all the other indexes.

Ongoing credit issues in the financial markets led to the Renaissance index’s poor performance in August and late November. However, these results were continually offset by market participants’ anticipations of possible interest rate cuts by the Federal Reserve Board, which renewed investor interest in higher-growth small-cap stocks, according to Renaissance.

Renaissance Capital is not affiliated with hedge fund Renaissance Technologies Corp.

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