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A Record Year for IPOs in 2021

We explore traditional initial public offerings (IPOs) and revisit some research on short and long-term IPO performance. 

We wrote last week about the record year for special purpose acquisition companies (SPACs) in 2021. We counted over 1,000 new listings last year, and remarkably over 59% were SPACs. Today we explore another group of listings – traditional initial public offerings (IPOs) – and revisit some research on short and long-term IPO performance. 

Record new listings in 2021

It was a record year for the IPO market in 2021, fueled by the popularity of SPACs. Based on Nasdaq data, there were over 1,000 new listings (~59% of which were SPACs). Of the 1,033 new listings, 73% listed on Nasdaq (Chart 1). 

Chart 1: 2021 was a record year for IPOs

Count of IPOs by Listing Exchange

It’s also worth noting the record capital raised in 2021, with $286 billion raised in 2021, representing an increase of 85% from 2020 (Chart 2). Although SPACs represented about 50% of this total, data from Jay Ritter show that 2021 operating company capital raised was a record, beating records last seen during the dot-com bubble. We should also mention that over 63% of the capital raised in 2021 listed on Nasdaq, including companies like RIVN ($11.9 billion), BMBL ($2.2 billion) and HOOD ($2 billion).

Chart 2: Record proceeds raised by IPOs

Capital Raised by Listing Exchange

Strong day-one performance again in 2021

Recall from a previous study that average IPO pops, representing returns from the overnight placement to close on the first day of trading, were around 18.4% from 1980 through 2020.

Our updated data show that the average first-day pop in 2021 was 34%, much higher than the long-term average but slightly lower than the average 38% pop in 2020. However, we note that the typical (median) stock only experienced a 13% increase on day one compared to 26% in 2020, showing that robust gains in 2021 were due to a smaller number of very strong first-day IPO returns. 

Chart 3: Distribution of first-day returns

First-day IPO Returns by Year

Despite that, many IPOs still fell on day one

We previously looked at factors that helped day one IPO performance be stronger. In essence, all provide a window into demand versus supply dynamics, where stronger demand, or lower supply, help generate stronger trading prices for IPOs on day one. They included:

  • Float size (smaller float limits supply)
  • Final offer price relative to filing range (the interest from institutional investors provides an early indication of demand levels, and an elevated price reflects more early demand)
  • Trailing market returns (shows that market-wide demand also helps IPOs) 

Despite the solid average IPO pop, data shows some IPOs still fall on day one. In fact, 33.6% of 2021 IPOs closed lower than their placement prices, right in line with the longer-term average of around 31% (Chart 4).

Chart 4: 34% of IPOs closed lower on the first day

Percentage of IPOs Closing Above IPO Price on Debut

This highlights the challenges and risks for investors trying to determine valuations of previously private companies, often with business models that are still achieving scale.

Most IPOs have yet to achieve scale

Confirming the fact that many IPOs have yet to achieve scale, data shows that around 80% of IPOs in 2021 were still not seeing positive earnings. That’s consistent with recent years, as well as the late-90s.

However, that trend doesn’t seem to affect the IPO pop. Long-term data in Chart 5 shows that first-day returns for unprofitable companies are usually close to the same as for profitable companies.

Interestingly, in 2021, profitable companies had slightly better IPO pops, which is in contrast to the trend in recent years

Chart 5: % of unprofitable IPOs remains elevated, but day one returns are roughly the same

IPOs with Negative Returns

But the average age of IPOs remains consistent 

Given that recent data shows most IPOs have yet to achieve scale and profitability, the average age of IPOs has remained fairly constant for over 40 years.

Interestingly, the dip in the age of IPOs in 1999 (in chart 6) aligns with the spike in unprofitable IPOs (in chart 5). But we don’t see the same lack of maturity in recent IPOs.

On a larger scale, IPOs are, on average, around two years older now than in the 1980s. That 20% increase in age actually coincides with a decrease in profitability – indicating it is getting harder to reach scale.

Chart 6: Companies continue to wait longer to go public

Median Age of IPOs

IPO long-run performance

More important to investors is how IPOs perform over the longer term.

The data still shows that long-term performance varies significantly, making day-one IPO returns seem immaterial. 

Over time, companies that overdeliver on growth outperform. Since 2010, the top decile of companies gained over 300% in three years post-IPO. That more than offsets companies that don’t meet IPO day expectations and fall over the same time, even though our data suggest that nearly two-thirds of IPOs do in fact trail the market three years post IPO. 

Chart 7: IPO Returns over the long run, by decile

IPO Returns Post-IPO

The data also shows that the bottom 10% of IPOs end up with returns that are more than 100% behind the market. That’s not a math error. It’s because we are looking at a difference in IPO returns versus market returns. If the market has gained a lot, the market return minus the IPO return can add to more than 100 percentage points behind the third-year market return levels.

Why does this matter?

IPOs are important for investors because they help bring new companies to the public markets, raising capital to help those companies grow profits and employ more workers. That represents opportunities for the public to invest in new, growth companies as well as potential employment for U.S. households.

Nonetheless, the data shows how much uncertainty there is around IPOs meeting their growth targets as they mature. That makes pricing IPOs difficult and is something that investors need to consider.

Over the longer-term, performance also varies significantly, which highlights the importance of doing your own research and understanding industry fundamentals to try to find the best value companies for investments. Although the average performance is roughly in line with the market-wide return over the same period, a diversified portfolio of IPO companies could benefit investors.

Robert Jankiewicz, Research Specialist for Economic Research at Nasdaq, contributed to this article.

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Phil Mackintosh


Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency. 

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