Ten years ago, an initial public offering was a rare bird. Capital was raised for corporations with high-yield bonds, revolving credit, secondary offerings and bank loans. Oftentimes, an IPO was just an afterthought.
But a remarkable change eventually occurred IPOs got hot.
According to Securities Data Co., investors pumped up to $109.3 billion into 1,700 new issues within the past two-and-half years.
Access to these potentially lucrative investments was another matter, of course. During much of the 1990s, access was limited to institutional investors and high net-worth individuals.
New Opportunity
Beginning in February 1998, however, individual investors moms and pops had a new opportunity to participate. Greenwich-based Renaissance Capital opened the door through the first-ever mutual fund devoted exclusively to the new-issues market The IPO Plus Aftermarket Fund.
"A lot of investors would love to get in on IPOs at the offering," said Linda Killian, a portfolio manager and one of Renaissance Capital's three founders. "That's the main reason we started the fund."
The fund's three managers, all former investment bankers, founded Renaissance Capital in 1991 to provide investors with an independent source for IPO research.
Now four months old, Killian said The IPO Plus Aftermarket Fund relies simply on word of mouth and does not advertise.
Even so, response has been "very enthusiastic." About 1,500 people have invested roughly $12 million, directly participating in some of the year's most successful offerings.
Moreover, access to these offerings is through some of Wall Street's largest syndicate operations, a gateway critics suggested would be difficult to traverse.
According to Killian, the fund's five largest holdings are:
*Keebler Foods (NYSE:KBL), the world's second-largest manufacturer of cookies and crackers, which debuted at $24 a share in February through a syndicate led by investment-banking giant CS First Boston.
*Steelcase (NYSE:SCS), the world's largest manufacturer of office furniture and related products, which placed 12.13 million shares at $28, through a syndicate headed by investment- banking giant Goldman, Sachs & Co.
*CB Commercial Holdings (Nasdaq: CBCG), one of the largest vertically-integrated providers of real-estate services, such as brokerage, investment management, property management, real-estate market research and mortgage banking through 107 locations. This November 1996 IPO priced 4.35 million shares at $20, through a syndicate headed by brokerage powerhouse Merrill Lynch & Co.
*E*Trade (Nasdaq:EGRP), a pioneer of the online brokerage industry. This August 1996 IPO priced 5.67 million shares at $10 1/2, through a syndicate headed by San Francisco's Robertson, Stephens & Co.
*Delia*s (Nasdaq:DLIA), a leading direct-mail retailer of apparel and accessories for teenage girls. The company's 2.35 million offering in December 1996 opened at $11, through a syndicate headed by San Francisco-based Hambrecht & Quist.
Other Holdings
According to Renaissance Capital's web site (www.ipo-fund.com), some of the fund's other top holdings include mutual-fund giant Waddel & Reed (NYSE:WDR), telecommunications provider Hyperion Telecommunications (Nasdaq:HYPT) and telecommunications-equipment company Reltec (NYSE:RLT).
The fund purchased at offering and still holds both Keebler and Steelcase. CB Holdings and E*Trade were both purchased in the aftermarket, a period defined by the fund as up to ten years after a company goes public.
Aftermarket investments, however, are confined to securities with unseasoned trading and are limited by research, float, public ownership, operating history, or relative anonymity in the U.S. capital markets.
Normal Conditions
Under normal market conditions, the fund will invest at least 65 percent of its assets in common stocks, and up to 25 percent in foreign stocks.
To prevent investors from flipping, or liquidating their holdings during difficult market conditions, the fund imposes a two-percent redemption fee on shares that have been held for less than 90 days.
"That's especially important when you're dealing with a small-cap fund, where stocks are generally less liquid," noted Jim Raker, who tracks the mutual-fund industry for Morningstar, the Chicago-based research outfit.
While impressed with its redemption feature, Raker said the fund's annual management fee of 1.5 percent of net asset value, or NAV, is slightly above the average 1.4 percent of the overall NAV charged for U.S. diversified equity funds.
Renaissance Capital capped total expenses at 2.5 percent of net assets, which is at the high end of average total expenses for mutual funds.
"It's not unusual for smaller funds to have higher management fees because they generally require more maintenance," Raker said.
But, he added: "The bottom line is that we're in an unprecedented bull market and investors don't pay as much attention to 100 basis points when they're making 25 percent or 30 percent each year."
The fund's NAV at the close of trading June 16 stood at $14.08, a 12.28 percent increase over the fund's initial NAV of $12.54 on Dec. 31, 1997, and about 4.6 percent above its NAV when the fund was opened to investors.
IPO Returns
While returns across the IPO market have soured in recent weeks, plummeting from 34.3 percent at the end of April to 12.94 percent as of mid-June, The IPO Plus Aftermarket Fund had pared just 2.8 percent of its gains as of June 16.
As the IPO calendar began to show signs of expanding in June, Killian was encouraged by the high quality and diversity of the new-issues market.
"This year's IPO market got off to a slow start," Killian said. "But throughout, the quality of offerings has remained relatively high."
One of the principal reasons for the robust market is a more diverse set of industries going public.
The emergence of rollups, or companies that consolidate fragmented industries (such as road services and equipment-rental concerns), Year-2000 business, online retailing and the expansion of healthcare, are expected to stoke the IPO machine, Killian said.
Experience
"There are a lot of factors coming together suggesting we'll have a sustainable market for IPOs," she said.
Banking on the long and varied investment experience of its management team, The IPO Aftermarket Plus Fund will consider most IPOs.
According to Killian, the only IPOs the fund disdains are real-estate investment trusts, or REIT's.
"We're diligent investors, and we do our homework on companies where we think there are opportunities," Killian said.
Stephen Lacey is associate editor of The IPO Reporter, a sister publication of Traders Magazine.
