Kathleen Smith: So far in 2014, there have been 228 IPO raising $73.5 billion, this includes the biggest IPO ever by Alibaba which raised $21.8 billion. This is the highest level of activity that we have seen since the 1999-00 internet bubble, but still much less than the approximately 500 IPOs completed in each of those years raising approximately $100 billion in each year. In the years following the internet bubble and the U.S. financial crisis of 2008 and European Sovereign debt crisis of 2011, IPO activity was well below trend. The pickup in activity began at the end of 2012 when investors became confident in owning growth stocks.

MutualFunds.com: What do you think were the key drivers in seeing such an uptick for IPOs this year?

Kathleen Smith: Returns. The IPO market is driven by returns, not just on the first day of trading but beyond the first day. Most investors only get a small allocation, if any, on the IPO, and, for those that intend to own a stock long term, they must build up positions in post-IPO trading. In 2013 we saw a significant upturn in returns. The Renaissance IPO ETF (NYSE symbol: “IPO”), a basket of the largest most liquid newly public companies, tracks an index that was up 54% in 2013. 2014 has been a bit more turbulent, but the index is still positive for the year. Those types of returns attract capital to the IPO market.

MutualFunds.com: Are there particular sectors that have seen more than the usual amount of interest?

Kathleen Smith: The interest in new companies has been broad, not just tech (cloud, ecommerce), but also energy (E&P, MLPs), consumer (healthy concepts), health care (biotech, automation), Chinese growth companies (Alibaba), P/E, Venture, yield, value, growth, etc.

MutualFunds.com: For those folks who are equating the success of the 2014 IPO with signs of an equity bubble, how would you address those concerns?

During the internet bubble there were a predominance of companies without earnings and revenues. We don’t see these conditions now, except for the biotech sector and certain growth tech names. Most importantly, the IPO buyers are mainly institutional and much more disciplined. For example, during the 1999-00 internet bubble, the first day pop averaged an unprecedented 50%+. The norm is about 13%. So far this year the first day pop has averaged 12.9% and over the past month, when the market was under stress, the first day pop was 8.7%.

MutualFunds: Do you expect to see a sustained pipeline of IPOs in 2015? What are some of the bigger names that investors will be hearing about?

Kathleen Smith: The number of companies that want to go public far exceeds what the market is willing to absorb. Basically, I would call it a buyers’ market. This is a good time for investors to develop positions in some of these major companies that will eventually make their way into benchmark indices and core equity portfolios. Some of the big names that we are focusing on are Paramount Group, owner of major city office towers that will have the largest ever REIT IPO of $2.6 billion; Cnova, a spinoff of the French Casino Group that will have $1billion IPO of its French & Brazilian ecommerce operation, and the $500 million IPO for peer-to-peer lender Lending Club.

MutualFunds.com: How has the resurgence of the IPO market impacted your firm?

Kathleen Smith: Our firm provides pre-IPO research and global IPO analytics to institutional investors and we provide investment products focused on unseasoned equities that include ETFs and separately managed institutional accounts. The higher level of IPO activity has increased our base of institutional research clients who are seeking value added insights about the upcoming IPOs. The strong returns on our portfolios has attracted capital to our ETF products which provide a low cost, less emotional, portfolio approach to owning newly public companies. Many individuals and advisors are using ETFs for asset allocation rather than selecting individual stocks. However, ETFs are very slow to include newly public companies and thus are missing significant companies tapping the IPO market. Our ETF products fill this gap. For example, Alibaba is the largest constituent (10%) in the Renaissance IPO ETF, making our ETF the largest holder of Alibaba among very few ETFS that hold this significant new name.