How often do you find yourself reading about successful IPOs? In my experience, not very often. Most business media outlets prefer to cover train wrecks. They're sexier. While bad IPOs may get all the press, let's see if we can find a good one.
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Case in point, Fortress Investment Group (NYSE:FIG), the first global alternative asset manager listed on the New York Stock Exchange. A Fortune magazine article reported that David Swensen, Chief Investment Officer of the Yale Endowment Fund, believes the five principles at Fortress are notoriously greedy, leaving regular investors with table scraps while the partners make out like bandits. This seems like a "bad" IPO and its numbers don't make it seem any better.
Failure To Deliver
In its 2007 prospectus, Fortress brags about a 98.6% compounded annual growth rate in assets under management between December 31, 2001 and September 30, 2006. Since going public in February 2007, this number actually shrank from $29.9 billion in September 2006 to $29.5 billion at the end of 2008. A little more than two years out of the gate and FIG is already in the dumpster.
New investors who bought a piece of the offering clearly are wishing they didn't. Priced at $18.50, it's now trading below $4.
Only Nomura Investment Managers seems to see light at the end of the tunnel. Despite being underwater by about $675 million, it bought another 5.4 million shares in a secondary offering in May for $27 million. That's putting a great deal of faith in five people who already banked $1.66 billion prior to the IPO and still hold $1.3 billion in stock despite a two-year, 75% drop in its stock price.
For those doubting the Fab Five's ability to get the job done, you could always take a look at other overpaid hedge fund companies like Blackstone Group (NYSE:BX) and GLG Partners (NYSE:GLG). They too have failed to deliver.
Good Offers Tough To Find
A good IPO is an offering that balances the needs of existing investors with those of new ones. By doing so, everyone wins. Anything less is irresponsible. Corporate finance, M&A and all other fundraising professionals suffer as a result.
One IPO that does a nice job meeting investors needs is Alnylam Pharmaceuticals (Nasdaq:ALNY), a developer of therapeutic drugs based on RNA interference, which essentially acts as an agent to silence certain genes. Current drugs in development include those for age-related macular degeneration and Parkinson's disease. The company is not yet making money, but it's getting close.
In 2006, sales for Alnylam were $27 million with a $34.6 million loss. Two years later, it generated $96.2 million in sales with a net loss of $26.2 million. With a little luck, it could break through into the profit zone sometime in 2010.
On June 10, both Roth and Jefferies & Co. initiated coverage of the biopharmaceutical newbie with a "buy" rating. Why not? Its stock is up 260% since going public. That's much better than similarly valued pharmaceutical firms Medarex (NYSE:MRX) and Medicis Pharmaceutical (Nasdaq:MEDX).
However, the most impressive finding is that the spread between what new IPO investors paid ($6 per share) and existing ones ($4.48 per share) was only 25%, representing a true partnership. Fortress only wishes it could say the same.
The Bottom Line
Good IPOs are win/win situations like Alnylam Pharmaceuticals. IPOs like Fortress, Blackstone Group and other asset management offerings only benefit the favored few. Staying away from them could mean a more secure financial future. (Read Hedge Funds' Higher Returns Come At A Price for more on this topic.)