IPO momentum continues in a big way
Pursuit of returns fuels risk appetite and broader array of new issues.
Defying expectations in a Covid-19-dominated year, investors last year piled into the U.S. initial public offering (IPO) market as companies raised $78.2 billion through a record 218 IPOs, according to Renaissance Capital. This year is going even stronger. Through July, 251 IPOs had been issued, raising $89 billion, putting the IPO market on pace to surpass 2000’s all-time high of $97 billion raised.
Here’s what’s driving this growth:
- Cyclicals are also beginning to participate While firms in the Technology and Health Care sectors—and its biotech subsector—continue to dominate IPO listings, there’s growing activity among cyclical names in Financials, Energy, Consumer Staples/Consumer Discretionary as well as Manufacturing, adding to an already robust market.
- SPAC dollars in search of IPO opportunity At the end of July, 380 special purpose acquisition companies went public. But increasingly, there’s been concern that the SPAC market is approaching bubble status as a number of these deals have either slumped or fallen through. Also, the Securities and Exchange Commission is raising questions about the accounting and governance of SPACs, with prospects for greater regulatory scrutiny on the rise. As a result, we expect a growing number of capital-seeking firms will turn to the traditional IPO market in the third and fourth quarters of this year.
- Rates have surprised to the downside From a high on March 31 of 1.74%, the 10-year Treasury’s decline—it’s trading at 1.31% at this writing—points to a likely unabated hunt for higher investment returns. We expect that many investors with large stores of capital will turn to the IPO market for long-term growth opportunities. Although substantially less than the high-flying 2020 IPO returns of nearly 45%, IPO returns so far this year have averaged an attractive 24.5% in their first week after going public.
As always: Buyer beware
IPOs typically are issued by young companies with the potential to generate greater returns than any other kind of stock. But it’s important to keep in mind that some of these companies have yet to post a profit. So, while the pace of today’s IPO market presents abundant prospects for attractive returns, it also means quality control is more important than ever. Some initially successful offerings can derail for myriad reasons, from internal difficulties to an inability to navigate external events. Especially in an exuberant, risk-on environment, most investors are best served by fund managers who not only benefit from early access to the IPO market but who perform extensive due diligence, getting to know companies, their management teams and competitive advantages long before they ever go public.