Reimagining Public Markets in 2021: What Covid Taught Us
When the coronavirus upended the U.S. economy in March, capital markets convulsed. The major stock indices fell by about 30% in a few weeks. Macro prognosticators warned of a long recession. Public market investors and companies in need of funding were stricken with panic.
And yet, everything turned out alright for equities – in fact, better than alright. Stock markets hit all-time highs last week. IPO volume is on track for a historic year. The pessimism of March and early April quickly faded as investors – buoyed by trillions of dollars in government stimulus and record-low interest rates – poured money into public companies and drove markets to new heights.
Above all, the impressive 2020 performance of equities underscores the importance of technology companies in driving economic growth and capital gains in today’s economy, while also foreshadowing what’s to come in 2021.
‘Companies are Actually Performing’
The broad stock market gains in 2020 have carried over to outsized performance of recent U.S. IPOs. The average one-day and one-week returns for 2020 IPOs is outperforming those of IPOS in 2019 and 2018, according to Dealogic data reported by Reuters. Software giant Snowflake (SNOW) and data firm Palantir (PLTR) have both tripled in value since their public market debuts. Looking ahead, this week’s hotly anticipated IPOs – DoorDash and Airbnb – have both raised their price ranges in response to high investor demand.
“One of the things we’re seeing is a lot of performance – companies are actually performing,” said Ed Zimmerman, a venture capital lawyer and investor. “They weren’t necessarily performing in the 90’s and during the dot com crisis.”
An obvious reason for that performance is that software and biotech companies are beneficiaries of the pandemic and make up a large portion of today’s public market debuts. The covid-19 pandemic is keeping people at home, accelerating the adoption of new technology, and highlighting the importance of healthcare innovation. As such, investors are recognizing the immediate and long-term value of today’s IPOs.
“You’ve really seen the public markets weed out the companies that have been rewarded or been displaced because of the pandemic,” said Nick Tsafos, a Partner at accounting firm EisnerAmper. “But with vaccines around the corner, I think the industries that have been punished might be the ones that provide the most value around the corner.”
Tsafos’ prediction reflects stock market activity over the last month, during which capital has rotated away from “growth stocks” – such as technology and biotech – and towards “value stocks,” like energy and financials. When Pfizer (PFE) announced on Nov. 9 its successful vaccine trial, the ensuing one-day rotation from growth to value was the largest since the financial crisis.
A longer term consequence of the pandemic on stock markets may be a wholesale transformation to an erstwhile staple of the IPO process: the investor roadshow, which historically involved business executives flying around the world to make the case for their IPO to institutional investors and bankers.
“IPOs used to be three weeks on the road; now, there are billions of dollars being placed in days through Zoom (ZM),” said Jason Ader, CEO of SpringOwl Asset Management. “What this pandemic has done is really made it easier through technology for IPO funding.”
Ader believes that elements of the roadshow will return, but that it may never recapture its former globetrotting glory.
“The reality is the first banker that gets on a plane and visits a client and takes market share, then everybody is going to jump on the plane,” said Ader. “My general view is that it will evolve back a little bit, but it’s changed forever.”
‘Choosing a different path’
This year’s booming IPO market was made possible in large part by SPACs, which drove IPO volume week after week, and whose sudden omnipresence in Wall Street circles became one of the hottest financial stories of the year (Read: SPACs 101). In numerical terms, some 216 SPACs and counting have raised over $73 billion on public markets in 2020, compared to just 59 SPACs raising $13.6 billion in 2019, per SPACInsider.
The established fund managers and Wall Street veterans who are sponsoring SPACs as side hustles drove the SPAC boom – not only by raising billions of dollars in capital, but by legitimizing the model for investors and companies looking to access public markets.
“When you have people who have made lots of money who are doing [SPACs], that enhances the credibility. They’re not in a cordoned off section of the market,” said Zimmerman, who added that maturer companies are opting for SPACs instead of traditional IPOs. “These are companies that could IPO and are choosing a different path – that’s a meaningful difference as compared to SPACs we saw five to six years ago.”
One reason SPACs took off in 2020 is that they’re less cumbersome than a traditional IPO, making them well suited for the unique market environment created by the pandemic.
“IPOs take a long time, and 2020 was a hard year to go through that process,” said David Russell, VP of Market Intelligence at TradeStation Group. “The market had its fastest correction ever, the economy had its worst crash since the Great Depression, [and] travel restrictions made roadshows difficult. The situation totally ran against the conventional wisdom for IPOs – SPACs were easier to get done.”
With dozens of publicly listed SPACs now seeking transaction targets, companies hit by the pandemic may be attractive assets. Similar to how private equity firms acquired distressed assets after the 2008 housing crash, SPACs could fill the post-pandemic void for beleaguered sectors, according to Tsafos.
“A SPAC might come in and bring some of these distressed companies together to have a stronger company. In the hotel industry, some of the smaller hotel chains would be ripe for consolidation.” Tsafos added that similar details could make sense in retail and commercial real estate.
Meanwhile, some believe the SPAC space is already showing signs of strain.
“The market has a lot of fringe sponsors and there’s too much liquidity,” said Ader, who expects to see in 2021 more competition for deals among the many SPACs that listed this year. “SPAC sponsors need to justify their carried interest when making a case to bring a company public,” he said. “If they can’t do that, there’s five other sponsors waiting in the lobby.”
There is also the question of how this year’s SPAC mergers perform in the long run, which may influence their future popularity with sponsors and investors alike. That’s especially the case because historically, SPAC deals haven’t always made money for investors. For instance, a WSJ report found that a majority of companies that merged with SPACs in 2015 and 2016 declined in value over the long run.
Next year will tell us whether the latest SPAC boom will hang around, according to Emil Michael, the CEO of DPCM Capital.
“2021 will be the year of testing whether SPACs can become known as a reliable vehicle for high-quality companies to go public.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.