Initial Public Offerings Set a Record Value in 2020

Initial public offerings set a record value in 2020 with $167.65 billion from 457 deals fueled by Special Purpose Acquisition Companies (SPACs) that raise money without a specified purpose, according to Dealogic, a provider of financial content and analytics.

The initial public offerings set a record value in 2020 compared to all other years going back to 1995 when Dealogic began tracking the information. In terms of the total number of initial public offerings (IPOs), 2020 ranks fifth in falling short of the historically high 848 in 1996, 621 in 1997, 586 in 1995 and 547 in 1999.

The IPO market surged in 2020 for the same reason other investments did well, as near-0% interest rates led investors to seek returns in new places, said Bob Carlson, chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets.

“The flood of liquidity provided by central banks and fiscal stimulus gave investors the cash to seek out those new sources of returns,” said Carlson, who also heads the Retirement Watch investment newsletter.

Initial Public Offerings Set a Record Value in 2020 With SPACs Lifting the Finance Sector

SPACs propelled the Finance sector to account for more than half of the total value of IPOs in 2020 by raising $85.07 billion in 252 deals, according to Dealogic. An increased interest in health care during the ongoing COVID-19 crisis helped that sector finished second with 103 total IPOs that amassed $24.85 billion. The Computers & Electronics sector compiled the third-largest number of IPOs in 2020 with 65 but raised $38.67 billion, or 55.62% more than the Health Care sector despite producing not much more than half the number of IPOs.

Health care gained heightened appeal from investors due to the global pandemic as people sought to capitalize on that trend, Carlson said.

The IPO process in general likely was streamlined by shifting to virtual road shows that can be done via video calls during a few days rather than requiring traveling from city to city seeking investors to support IPOs that would take additional time. The more efficient process aided the emerging popularity of SPACs, he added.

“Another factor is that many IPOs made a smaller number of shares available than would have been the case a few years ago,” Carlson said. “The scarcity increases the price and pushes demand for IPOs higher.”

Initial Public Offerings Set a Record Value in 2020 and Should Stay Strong Heading into 2021

“The market for IPOs really surged toward the end of 2020, and I expect that momentum to carry forward into 2021,” Carlson said. “Technology and health care are likely to remain popular themes with investors. There’s a pipeline of companies getting ready to go public, and that’s fueling more interest in IPOs.”

Carlson urged individual investors to be “careful” in buying shares issued by companies that recently have gone public.

“In IPO surges, low-quality companies find it easier to go public at generous prices,” Carlson counseled. “Take a good look at a company’s fundamentals before trying to participate in an IPO. These periods of IPO popularity usually end when investors are burned after one or two low-quality IPOs fizzle shortly after going public.”

Pension fund chairman Bob Carlson answers questions from Paul Dykewicz before COVID-19.

Pershing Square, Snowflake and Airbnb Help Initial Public Offerings Set a Record Value in 2020

The three largest IPOs in 2020 were financial company Pershing Square Tontine Holding Ltd. (NYSE:PSTH), raising $4 billion; technology company Snowflake Inc. (NYSE:SNOW), gaining $3.86 billion; and Airbnb Inc. (NASDAQ:ABNB), collecting $3.83 billion. Close behind were DoorDash Inc. (NYSE:DASH), producing $3.37 billion; Lufax Holding Ltd. (NYSE:LU), attracting $2.69 billion; and health care company Royalty Pharma plc (NASDAQ:RPRX), capturing $2.50 billion.

Pricing of Special Purpose Acquisition Companies Takes a Hit in October

A small bump in the road for SPACs in the United States came in October when the size of the IPOs fell in price compared to earlier in the year, according to Dealogic’s data. In the first nine months of 2020, U.S. SPAC IPOs had seen an average increase of 18.7% in the size of the IPO at pricing compared to the initial value at announcement. But in October for the first time in 2020, U.S. SPAC IPOs incurred a negative monthly change with an average decrease of 6.2% on their final deal value compared to the initial value.

Further headwinds for SPAC IPOs appeared in the aftermarket performance, as newly issued SPACs last October generally failed to climb much on the first day, with that month showing the lowest one-day return of just 0.34%, compared to other months in 2020. Despite the weakness, U.S. SPACs became the IPO story of the year.

Highlights include 50 SPAC IPOs priced in October to mark the largest number of deals produced in a single month. They accounted for 60% of U.S. IPOs for that month alone.

A total of 40 bookrunners participated in U.S. SPAC IPOs in 2020, the most ever in a single year. The current average time between initial filing and pricing of the IPO for 2020 US SPACs settled at 26 days in late 2020, compared to an average 31 days for the past five years.

Third Wave of U.S. SPAC IPOs Remains Underway

This current trend is part of the third wave of U.S. SPAC IPOs which began in 2017. The first wave started in the 1990s when the Securities and Exchange Commission (SEC) first introduced the SPAC rule. The second wave then began around 2003 when some large banks first started to participate in this market segment.

“This was clearly where the sizzle was last year, and the dynamics reflect one of my favorite market phenomena: animal spirits,” said Hilary Kramer, host of a national radio program, “Millionaire Maker,” and head of the IPO Edge, GameChangers and Value Authority advisory services. “When good things start happening on Wall Street, it’s contagious. The excitement spreads. Profit compounds. And when the supply of good news is constrained elsewhere in the world, the hot spots can reach temperatures that defy normal limits.

“Last year was extremely disruptive for the global economy. Companies that dominated their markets in 2019 took a big step sideways. These aren’t nimble organizations. They’re big and unwieldy in a crisis. Disruption is rarely their friend unless they’re exploiting their scale to disrupt someone else’s business. And when disruption comes from outside the system as it did in the pandemic, the playing field flattens fast.”

Initial Public Offerings Set a Record Value in 2020 and Draw Attention from Money Manager

The winners in that kind of red-hot environment were already working off a fierce competitive business plan . . . move fast, take no prisoners, Kramer said. And the smaller and younger you are, the less you have to lose, she added.

“You don’t play defensive,” Kramer added. “You can go for broke. That’s the kind of company that rewards investors who can grab it in the IPO or even before. They’ve rewarded my subscribers with triple-digit-percentage wins: new household names like Chewy Inc. (NASDAQ:CHWY), unicorns like Palantir Technologies Inc. (NASDAQ:PLTR) and Sprout Social Inc. (NASDAQ:SPT).”

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

Columnist and author Paul Dykewicz interviews Hilary Kramer, whose premium advisory services include 2-Day Trader, IPO Edge, Turbo Trader, High Octane Trader and Inner Circle.

“Another thing that’s great about these companies is that they have room to double and redouble without straining market credibility much,” Kramer said. “Compared to Big Tech, these are still relatively small stocks. Take SPT, a next-generation response to social media networks like Facebook Inc. (NASDAQ:FB): it’s up 140% for my subscribers in its first year, but that move only added $1.5 billion to its market capitalization. Just to reach Twitter Inc. (NASDAQ:TWTR) proportions we’d need to see 1,500% more upside from here. Meanwhile, FB needs to find another $750 billion just to double one more time. How likely is that, on any given day?”

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

“Anyway, what happened last year in the IPO market boils down to investors realizing that in a disrupted world dinosaurs would suffer while more nimble competitors would get an opening to thrive,” Kramer continued. “Delivery and work-from-home companies started the boom. The vaccine gold rush got the fire going under every biotech stock with an angle on fighting viral infections, no matter how theoretical that connection was. And when CEOs and investment banks felt that heat, they rushed to get their companies onto the market. Deal volume soared. Every successful exit fed the fire.”

Initial Public Offerings Set a Record Value in 2020 and Window Stays Open as 2021 Begins

Where are we now? The exit is still wide open and great companies are still taking advantage of it while they can, Kramer opined.

“We’ve done well in Airbnb Inc. (NASDAQ:ABNB) so far and of course PLTR,” Kramer said. “As long as the Fed keeps printing money, there’s plenty of cash to absorb additional supply. Biotech may be getting a little tired, but finance and new takes on technology keep bringing plenty of innovation to the table.”

Chart courtesy of www.stockcharts.com

Chart courtesy of www.stockcharts.com

Mark Skousen, who heads the Forecasts & Strategies investment newsletter, said the IPO flow in 2020 appeared to be aided by the “flowering of new technology.”

He recalled Forbes magazine once publishing an article that reported two years after IPOs are completed, the majority of them sell for less than their initial offering price.

“Investing in IPOs is definitely high risk — it’s the story of the burning match,” Skousen said.

Mark Skousen, a descendant of Benjamin Franklin, meets with Paul Dykewicz in Philadelphia.

COVID-19 did not slow the IPO market at all in 2020. The IPO deal flow overcame totals of 21,045,468 cases and 357,166 deaths in the United States, along with 86,383,986 cases and 1,867,676 deaths worldwide, as of Jan. 5, according to Johns Hopkins University. The United States unfortunately has the dubious distinction of suffering the most cases and deaths of any country.

The IPO market reached new records for dollar value in 2020, and the flow is showing no signs of ending soon. The effect of the Jan. 5 special election results for two U.S. Senate seats in Georgia will become clear in the days and weeks ahead, so investors need to beware of any changes that could put the brakes on the IPO bandwagon.

Paul Dykewicz, www.pauldykewicz.com, is an accomplished, award-winning journalist who has written for Dow Jones, the Wall Street Journal, Investor’s Business Daily, USA Today, the Journal of Commerce, Seeking Alpha, GuruFocus and other publications and websites. Paul, who can be followed on Twitter @PaulDykewicz, is the editor of StockInvestor.com and DividendInvestor.com, a writer for both websites and a columnist. He further is editorial director of Eagle Financial Publications in Washington, D.C., where he edits monthly investment newsletters, time-sensitive trading alerts, free e-letters and other investment reports. Paul previously served as business editor of Baltimore’s Daily Record newspaper. Paul also is the author of an inspirational book, “Holy Smokes! Golden Guidance from Notre Dame’s Championship Chaplain,” with a foreword by former national championship-winning football coach Lou Holtz. The book is great as a holiday gift and is endorsed by Joe Montana, Joe Theismann, Ara Parseghian, “Rocket” Ismail, Reggie Brooks, Dick Vitale and many others.