Angus Kennedy (featuring Robert Miller)
2020 turned out to be a record year for IPOs despite widespread shutdowns. Over US$331 billion was raised globally, reflecting a 42% increase in volume from 2019. In the previous edition of this collection, we discussed the market trends underpinning this eventual breakout.
While we enter 2021 with much uncertainty it appears likely that record low-interest rates and extended periods of fiscal stimulus are here to stay. In this, the second instalment of our IPO collection (you can find #1 here) we reached out to 3 market experts to unpack the core trends they think will emerge going into 2021 in terms of IPOs, and the notable catalysts that will drive such shifts.
Dean Fergie, Cyan Asset Management
Certainly domestically, as the economy moves into what we’d all hope is a stable, Covid-normal state, we’re likely to see less hype surrounding Covid tailwind style companies and a more balanced selection of companies come to market. There’s no doubt the benign performance of a number of IPOs in the past couple of months has tempered investors’ enthusiasm for new issues so I suspect it might be a slow start in 2021.
There are some well-publicised, long-term structural tailwinds born out of COVID (e.g. e-commerce, technology transformation, etc) which have resulted in IPOs coming to market perhaps years in advance of when they might have otherwise, or brought companies to market that may have never been an IPO candidate before. Equally, COVID has likely delayed or cancelled IPO plans for many businesses that suffered as a result of the pandemic, who have preferred to regroup and look at other avenues.
Universally, assets are priced off interest rates, hence record low rates have certainly had an impact upon current valuations. People have been saying for years that should interest rates normalise, then valuations will drop. That may be true, but perhaps the right question to ask is, what does it mean to have interest rates normalise? If low rates are likely to stay indefinitely, it is likely to be other external factors which drive valuations.
Regarding IPO trends in 2021, the only thing we could say is whatever trends were predicted 12 months ago would have turned out to be wrong, so in 12 months time from now, anyone who says they know would be guessing at best.
Our guess would be that the IPO window will take a breather, or shut at some point in 2021. There will always be quality companies looking to IPO for the right reasons but equally, will the marginal investor be willing to pay valuations pricing in ‘blue sky’ recovery or growth opportunities? We would prefer to be cautious and do not think the pace and ferocity of the 2H2020 IPO window is sustainable in 2021.
Martin Pretty, Equitable Investors
The footnote to the description of a buoyant 2020 for IPOs is that the market has appeared to take a more discerning approach in the last few weeks. We have had several IPOs cancelled and ready-made meals company YouFoodz got its listing away but then fell 25% on its first day.
I would like to think that there is more than just fatigue at work. A common structure to fund companies preparing to IPO has been to conduct a "pre-IPO" raising where investors commit capital that will be converted to shares at a discount to the IPO price. Quite often that discount is around the 20% mark. It was probably a healthy sign that just recently the market did not support a proposed IPO with convertible notes on issue that were to be converted to ordinary shares at a 50% discount to the IPO price.
December 2020 may have set up a 2021 where IPOs are structured and priced with a little less hype and more discipline and conservatism. Low interest rates will certainly continue to force investors to look at equities, including IPOs. Equities are trading at a spread of about 4% on government bonds if you use the sharemarket's earnings yield so even if interest rates increase a little, equities should remain attractive - remembering that the earnings yield used to trade on par with interest rates before the GFC and the era of low interest rates.
Takeover activity also appears to have heated up and if it continues into 2021, it will put cash back into the hands of investors looking for opportunities to redeploy it.
Naturally, much of the discussion around what markets will look like in 2021 hinges on how the Covid situation evolves. On this note, each of our experts believes it is unlikely markets will have the appetite to maintain the explosive growth experienced during the back-end of 2020. Despite extended periods of investor enthusiasm, it appears as though a period of IPO fatigue is inevitable, so prospective public companies may have to reconsider how they are looking to raise capital during in year ahead.