2020 - The Year of the IPO
First impressions suggested that 2020 would be another unremarkable year for US IPOs, with the NYSE and NASDAQ raising $19 billion and $17.4 billion respectively via conventional IPOs in the first half of the year. However, as has since become apparent, 2020 was anything but ordinary. At the time of writing, funds raised via US IPOs sits at $149 billion - over double 2019’s $62.5 billion and almost 50% greater than the dotcom bubble’s $107.9 billion.
Around half of the proceeds this year came via 2020’s hottest investment opportunity - SPACs. SPACs enable companies to bypass the traditional IPO process in going public, providing a quicker and easier alternative. The pandemic has only reinforced their appeal, with volatile markets threatening to derail traditional IPOs while the company satisfies the regulators and finds the appropriate underwriter - a lengthy process.
What has stimulated the increase in traditional IPO fundraising?
Firstly, looking at the supply-side: central banks across the globe have adopted expansionary monetary policy in order to mitigate many of the risks posed by COVID, keeping interest rates at all-time lows. Low interest rates lower the cost of equity financing and hence, offer firms a relatively cheap source of funding for their expansion. Further, the pandemic and consequent government restrictions have thrown previously unknown firms like Amwell Health and Zoom into the limelight, enabling them to capitalise on lofty investor sentiment via IPOs.
And as for the demand side, fintech companies like Robinhood have made markets accessible to the average investor, offering businesses new customers to whom they can sell their shares. Moreover, regulatory approval of new vaccines suggests that we may be beginning our return to normal life - or as close to it as we can get in a post-COVID world. Experts expect the economy to resume operation in early 2021, and the market has reflected this. Investors - keen to take advantage of rising share prices - have shown strong demand for new stocks, which reinforces supply-side incentives.
Will it persist?
In the short term, the answer is probably. Goldman Sachs’ co-head of global internet banking, Jane Dunlevie, believes that there are over 70 companies worth $5 billion or more getting ready to go public - most notably Robinhood which was valued at $11.7 billion in August’s private fundraising and is said to be at work on an IPO for early 2021, where experts believe it may earn a valuation as high as $20 billion. The future of IPOs further afield is uncertain. As the dust settles in the aftermath of the pandemic, we are unlikely to see the strong investor demand driven by rapidly rising markets that we are seeing now, and interest rates will need to rise if the Fed is to meet its inflation target of 2%.