The coronavirus pandemic may have put a damper on the stock market for a while, but the bull market has come roaring back – and with it, the initial public offering, or IPO, market. Investors should expect the last part of 2020 to remain strong, say experts, with the market expected to debut a number of big names such as Airbnb and Snowflake.
While a shaky market typically shutters the window for new capital, especially for marginal firms, this year’s crop of IPOs seems to have been a bumper one, at least in tech areas. The market has been on a tear, and IPO sponsors are looking to take advantage of investors’ increasing appetite.
“The IPO market is on fire,” says Michael Gray, partner at law firm Neal, Gerber & Eisenberg in the Chicago area and head of the firm’s private equity, venture capital and growth companies practice. With the caveat of some key risk areas, Gray doesn’t see a slowdown in the IPO market this year.
Big names to hit the market soon
While the market remains strong, companies are looking to go public, with major venture capital or private equity companies looking to debut their portfolio companies on the market. But is this a case of large investors cynically looking to cash out and slide through a closing door while the market stays strong, or really playing offense with the expectation of a healthy market?
The latter, says Sam Hendel, president and portfolio manager at Levin Easterly Partners in New York City. “They’re hitting the funding window when they need to hit the window,” and it’s not just about a cash grab while the market holds up. “Everyone’s concerned about COVID, but these companies are doing well and they want to go public.”
“I think there’s a longer-term opportunity to take advantage of the market here,” says Gray.
“There’s nowhere else to put your money right now with interest rates being virtually zero,” says Gregory Sichenzia, founding partner at law firm Sichenzia Ross Ference in New York City. “Because of this, there is a lot of momentum in the market and companies are ready to take advantage of that.”
However, the strongly bullish move in the market since May has given some investors pause, and many are pointing to this melt-up as a case of 1999-2000 all over again. But in 2020’s haul of potential IPOs, many don’t see the bubble valuations that characterized the dotcom stocks.
“The companies that we’re seeing going public in the tech world today are performing,” says Ed Zimmerman, chair of the tech group at law firm Lowenstein Sandler in New York City.
The pandemic may have dampened some spirits, but it hasn’t always put a hit on companies, especially those in the tech sector, such as software-as-a-service (SaaS) stocks. In some cases, the pandemic has actually strengthened the hand of some tech companies, accelerating the market dynamics, such as digitalization, that make them a more valuable investment.
With many “normal” sectors such as hotels, airlines and energy hit by the pandemic, “tech companies are the clear winners in the current COVD-19 world,” says Frederik Mijnhardt, COO and CTO of equity advisory firm Secfi in Amsterdam. “Crowding-in of investors in tech stocks has contributed to inflating share prices and valuations.”
So without a huge negative effect from the pandemic – sometimes the reverse – and solid performance, some major IPOs appear close to hitting the market. They include:
While this housing-sharing app hasn’t been unaffected by the pandemic, it’s more resilient than some traditional peers. At one point in 2020, bookings had fallen by 90 percent, but the company has seen a remarkable rebound, enough to encourage the company to file in mid-August for an IPO.
This cloud data company has been hot in 2020, and its valuation has increased dramatically. This IPO received a vote of confidence from Berkshire Hathaway via a $250 million pre-IPO investment. While Berkshire’s legendary investor Warren Buffett typically stays away from IPOs, one of his key investors likely made the buy.
This food delivery app likely benefited significantly from the pandemic, at least in the short term, as stay-at-home diners hit it up to bring restaurant food to them. The company looks like it might debut in the fourth quarter.
This secretive data-mining company is about to go public via direct listing, an unusual way to get onto the market (recently used by Slack and Spotify) that doesn’t involve raising money from investors. The company is set to debut in a few weeks.
This grocery-delivery app is looking to debut, but it might not make it to market in 2020. Still, plenty of eyes are on the quickly growing company and expect it to debut in the not-too-distant future.
This project and productivity software company is also going public via a direct listing, and won’t raise money in its debut. It’s looking to reach the market by the end of September.
This free trading app – mainly for stocks and crypto – is one of the most popular investing platforms in the brokerage industry, with millions of users signing up. During the pandemic’s early days, it became a poster child app for stay-at-home parents and those who wanted in on the action. The extent of those stories may be overblown, but there’s no question that the pandemic made Robinhood the face of the industry for many.
Watch out for SPACs, too
While those are some of the “brand name” IPOs, many others fly under the radar, and they’re popular among a sophisticated kind of trader. They’re called SPACs, and these IPOs may be even hotter than those of big tech companies.
SPAC stands for special purpose acquisition company, and they’re also known as “blank check companies.” They raise money from investors, often in the area of a few hundred million dollars, and then look for an acquisition in the private market. SPACs have a deadline to find a deal (often a couple years), and if they don’t consummate a transaction they have to return the money to investors who own the stock. In the interim, the funds in the SPAC may earn a pittance.
By total capital raised, SPAC IPOs in 2020 have already surpassed the performance of 2019, when the market as a whole was strong. Exactly 82 SPACs have gone public in 2020, as of September 9, according to Renaissance Capital, and they’ve raised a record $31 billion, with a few months left in the year still to go. Noted investor Bill Ackman brought one public in July with more than $4 billion to invest.
This year’s total performance dwarfs last year’s, when SPACs raised about $13.6 billion, an already strong showing from an oddball niche followed mostly by pros.
SPACs may offer an interesting possibility for investors. They let investors see what deal a company signs, allowing them to bail on the deal if they don’t like the acquisition. Hendel calls it a “free look at what the sponsor finds.”
But SPACs can have some downsides, too. And many don’t complete a transaction. In fact, since the start of 2015, less than half of publicly traded SPACs have consummated a deal.
“SPACs – what happens if they clock out before they can roll out a company?” asks Zimmerman. “They may close deals, but they may catch falling knives to complete their mandate.”
That is, they may rush to buy an unattractive stock just to get a deal done. So while SPACs may be the province of more sophisticated investors, that doesn’t make them sure-fire moneymakers.
Risks to the IPO market
The biggest risk to the IPO market is general weakness in the stock market. Funding for IPOs is some of the first to dry up as the market gets frothy, so IPOs depend on a stable climate. That’s not exactly the setup we are likely to see two months before a highly contested presidential election.
While many experts remain quite bullish, they’re not being naive about the risks to the market.
“I’m bullish on the market with the caveat that there’s a lot of major risks,” says Gray, noting the election specifically. But he notes: “The liquidity created by the Fed and other governments cannot be ignored. Stimulus will make a massive difference to keeping the market going.”
Zimmerman thinks the election will be enormously important for the markets, and it has the potential to throw stocks in one direction or the other. He says IPO sponsors need to think carefully about the timeframe for their investments and how they might deal with fallout from November.
Hendel also remains bullish: “We’ll be strong right up into the election and maybe after,” with a pause around the election.
If capital dries up, that could lead companies to take an alternative path to get into the public market, says Meredith Beuchaw, head of mergers and acquisitions at Lowenstein Sandler. Companies are prepping for potential disruptions, even if they don’t come to pass.
“Companies are finding creative ways to get to market – IPOs, SPACs,” she says. “They’re dual-tracking an entry into public markets, perhaps through a merger or acquisition.”
And of course, everyone sees the potential for the COVID-19 pandemic to disrupt things further. But that doesn’t keep many market watchers from being ultimately bullish. They advise watching investors’ reception to upcoming IPOs to judge the overall tone of the market.
“I don’t see a slowdown in IPO activity,” says Gray.
If the market as a whole holds up, IPOs should continue to hit the market and remain robust. While there are no guarantees, investors have shown an abnormally high level of animal spirits as the government and the Fed have flooded the market with liquidity. However, coronavirus outbreaks and the uncertainty of continued government stimulus pose potential risks to the IPO market continuing to burn brightly.
And as with any stock, if you’re buying it, you need to carefully analyze it. Novice investors are often best served by sticking to a broadly diversified index fund.