On the day Treasury Secretary Paulson calls for tougher banking regulation, it's worth remembering that less than two years ago, the Paulson-backed Committee on Capital Markets Regulation was campaigning for the opposite.

The committee released a report in November 2006 arguing, in part, that financial market oversight needed to be relaxed, otherwise the U.S. -- New York City in particular -- would lose its place as the world's money center. The primary evidence for this argument was that the U.S. share of the IPO market was falling, and the blame for this was placed on Sarbanes-Oxley, everyone's favorite piece of post-Enron legislation.

It’s been a tough year for new issues as broad market indices log double digit losses and liquidity has been hard to find.  While some IPOs like Visa Inc. (V) and Intrepid Potash, Inc. (IPI) have scored large gains, these success stories have been more the exception than the norm.  As investors cut back on risk, new issues face an even greater challenge than their blue-chip brothers.  Since recently issued IPOs are considered more risky and have less institutional sponsorship than larger well known companies, they are often more likely to be sold as investors begin to raise cash balances.

The calendar this week is relatively light with only a few deals pricing, but there appears to be one name that will do exceptionally well.  The company is Energy Recovery, Inc. (ERII) and the firm operates in two of the best performing areas of the market.  The first, obviously is energy and the second is the water treatment area.  As populations across the nation and across the globe continue to increase their use of treated water, the demand is beginning to outpace supply levels.  New water treatment plants are being built and Energy Recovery sells equipment for many of these projects.

So, the venture capital "asset class" is in crisis. Or at least that's what the NVCA is saying today as it rings the alarm bell asking for politicians, regulators, venture capitalists, entrepreneurs, dogcatchers, presidential candidates, philatelists, etc., to do something -- anything! -- about it.

Of course, readers of this blog won't be surprised at news that this is the first quarter in recent history in which there have been zero, zip, nada VC-backed IPOs. I wrote about that fact here last week, and the story was picked up over the weekend by the good folks at the NY Times. So, no surprise.

Energy Recovery (ERII) is the latest addition to publicly available investment vehicles for the world’s looming water problems.  They sell technology that reduces the fraction of unused energy during sea water reverse osmosis [SWRO], one method of desalination. They are tentatively scheduled to IPO today.  Nobody, that I’m aware of, has commented publicly on the deal, specifically with respect to either the economics behind SWRO plants nor the valuation of the target of $7 - $9.

With respect to the economics behind the plants they sell to, they are popping up all over the world, so the numbers must work.  It’s obvious the customer base will likely continue to grow.  I didn’t quite finish my research in time for the IPO but I was curious as to what fraction of the bills of a new plant are likely spent on the types of technology Energy Recovery sells, to try and estimate the size of the market. 

There were no venture-backed IPOs in the second quarter, and M&A deals are down. The last time there were no VC-backed IPOs in a quarter was in 1978. The liquidity drought for venture-backed startups is so bleak that the National Venture Capital Association is calling it a “crisis.” Last quarter there were only 5 IPOs that brought in a piddling $283 million. That compares to 43 IPOs during the first half of 2007 that brought in $6.3 billion.

(During the first half of 2008, 42 companies were in registration for an IPO, but they never pulled the trigger—versus 70 for the same period in 2007).

The next hot IPO may be an American Depository Reciept [ADR] from Russia - Russian Search Engine Yandex.

In Russia, the BRIC country benefiting most from the current energy boon, citizens rely on the search engine Yandex much more than Google for their search needs. While Google is fighting for leadership in several markets, it's losing in Russia. Yandex currently holds a 45% search share, beating Google's 35%.

The National Venture Capital Association is about to roll out a media effort aimed at getting the word out about the great IPO drought of 2008. The first stop in this campaign was the NY Times: Matt Richtel wrote about it yesterday:

In the second quarter of this year not a single company backed by venture capitalists has gone public. It is the first time that has happened since 1978, according to a venture capital industry group.

On June 11, Bill Simpson wrote an analysis of Fifth Street Capital (FSC). In its June 18 IPO, the company raised approximately $141.2 million in gross proceeds.

All shares were offered by the company.

Verso Paper Corp. (VRS) came public midway through the month of May with a pricing of $12.00 per share.  After many other successful launches of IPOs in April, underwriters were trying to make the most of the new-found liquidity and get as many deals priced as possible in order to collect their fees while they could.  Verso Paper, however, didn’t possess many of the same characteristics that made IPOs such as Visa (V) and Intrepid Potash (IPI) successful.

For starters, the company is operating in a very stale sector.  As a manufacturer of coated paper, the company is very much at the mercy of the overall economic environment.  Most of Verso’s business comes from the direct mailing and catalog industries which are seeing volumes decline as weak consumer spending makes this type of advertising much less effective.  Industry statistics showed a 4% decline in catalog circulation in the first quarter which is certainly not good news for the company.  While many analysts are optimistic that these dynamics will change, an optimistic viewpoint seems more based on hope than on the current evidence in the market.

The IPO market stinks. Near as I can tell, there hasn't been a single venture-backed IPO in the second quarter of 2008, which would be the first quarter in which that has happened since ... well, as long as I have data. Admittedly, the first quarter was no hell either, with only 5 VC IPO babies making it out the door.

Here is the quarterly VC IPO data from 2005 until today:

Ice-class vessels are those that have been certified for transportation in icy conditions, which exist in the Baltic region half of each year. DWT has contracted to purchase an additional six Panamax ice-class drybulk vessels, which are scheduled to be delivered between Jun 2009 and Sep 2010. Upon delivery of these additional vessels, DWT will increase its dry weight capacity by 72% to 1.1 million and its owned fleet will consist of 28 vessels, including 19 dry bulk vessels, 11 of which will be ice-class. This expansion will allow DWT to significantly grow its revenue, and extend its leading position in ice-class service.

We were recently doing some IPO analysis and decided to see how Bloomberg's IPO index has done versus the broader market over the last year and a half.  Below we highlight the performance of the Bloomberg US IPO index versus the S&P 500 since the start of 2007. 

As shown, Bloomberg's IPO index is down 0.88% (essentially flat) since January '07, while the S&P 500 is down 5.52%.  This outperformance from IPOs is somewhat surprising given the credit crisis and uncertainty that is out there, but it's important to note that the index is a lot more volatile than the S&P 500.  In mid-March, the index cratered much more than the S&P 500, but it has reversed sharply since then.

I’m a skeptical and analytic person, but I think HEK still has upside…unless it’s a scam.  (No offense Dick H.)  I started a position at $8.27, upon the first few days of the stock showing strength.  I was a little skeptical, because the stock was just too much of a bargain.  I say this because of the guidance combined with likely valuation multiples, the macro economic trends, and Dick Heckmann’s track record.  The fact that the stock didn’t jump into the low teens made me feel like there was something I was missing.  I set out to figure out what.

Like every other person holding HEK, after the deal closes, I will own a tangled mess of subsidiaries, as well as a history so convoluted retail investors may give up trying to sort it out.  See, Heckmann is buying a company, China Water & Drinks, which is actually an amalgamation of 11 subsidiaries, with some more on the way.  The summation of these groups and holding companies now sells bottled water in China. The parent company which merged with China Water & Drinks, UGODS Inc,. used to be a junior mineral explorer in Canada. If you didn’t read that last part twice, check your pulse. This is according to SEC filings, and the China Water & Drink 2007 Annual report.

It’s three months later, and we’re finally learning what all of that IPO money was for.

When Visa (V) IPOed in March, the company reserved $3 billion of its jaw-dropping, record-breaking $19.7 billion public offer for what it called a litigation fund, and now we know why.

All quotations are from the company’s most recent S-1 filing with links provided.

All quotations are from the company’s most recent F-1 filing with links provided.

Venture capitalists continue to roll out filings of public offerings with hopes the market will give in, but public investors haven’t budged in more than two months, acccording to Dow Jones VentureWire reports (subscription required).

May was the second consecutive month that no venture-backed companies have reached the public markets. In fact, heart-rhythm monitor specialist CardioNet was the last such company to stage an IPO, on March 19.

Since my fund concentrates on new issues (IPOs) and companies issuing additional stock, and my blog usually covers stocks that fit in this area, I thought I would share some insights on the syndicate calendar and how the dynamics are changing.

After six months of very little activity, April saw much needed liquidity finally hit the markets. Since many companies had been waiting for better conditions to offer their stock, there was a glut of supply that came to market once the window opened. Initially, there was plenty of demand to soak up all the additional supply and deals performed very well. Stocks like Colfax Corporation (CFX), Intrepid Potash, Inc. (IPI) and Visa Inc. (V) all saw buying push their stocks significantly higher. Even more established names further away from their IPO’s were in demand. China names in particular such as China Finance Online Co. (JRJC), E-House (China) Holdings Limited (EJ), and Giant Interactive Group Inc. (GA) saw their shares appreciate dramatically.

When serial entrepreneur Naveen Jain left the company he founded, InfoSpace (INSP), in disgrace in late 2002, a lot of people thought he would never be trusted by the financial markets again (see this three part series from the Seattle Times that talks extensively about the rise and fall of Jain at Infospace and details his violations of insider trading laws). At its height Infospace was worth $31 billion. Today it’s worth less than 1% of that.

But memories are short, it seems. After leaving InfoSpace Jain started a new company, Intelius, across the street from his old offices in Bellevue, Washington. The company sells background information on people - they describe themselves as an “information commerce company.” They’ve grown rapidly and now claim that over four million people have purchased products from them. Revenue has grown from $18.1 million in 2004 to $88.5 million in 2007. In their most recent fiscal quarter, ending March 31, 2008 the company had $31.8 million in revenue, a nearly $130 million run rate. They are also very profitable, with $22.5 million in EBITDA in 2007.

All quotations are from the company’s most recent S-1 filing.