Fever pitch: IPO market heats up

January 2021  |  COVER STORY  |  CAPITAL MARKETS

Financier Worldwide Magazine

January 2021 Issue

In the first half of 2020, global IPO activity was down considerably compared to previous years as the coronavirus (COVID-19) pandemic slowed the market. Volumes and proceeds fell by 19 and 8 percent respectively, compared with the same period in 2019.

In the second quarter of 2020 there were only 97 listings worldwide, down 48 percent year-over-year, according to EY’s quarterly Global IPO Trends report. Proceeds dropped to $13.2bn, 67 percent down on April and May 2019.

In the UK, for example, IPO activity had already been trending downward prior to the pandemic, with the uncertainty surrounding Brexit causing headwinds. According to PitchBook, just 34 UK-based companies went public in 2019, the lowest number since 2009. Then, in the first half 2020, activity essentially ground to a halt.

“The IPO market has seen a wild ride in 2020,” says Mollie Duckworth, a partner at Baker Botts. “Virtually all capital markets activity, along with so many other aspects of the economy, was at a standstill during much of the second quarter. There is a significant amount of pent up demand for equity capital and the public currency that comes with an IPO. COVID-19 has injected an additional layer of uncertainty into the capital markets, and when you add to that the oil price volatility experienced this year and questions around the US election, it means that both issuers and investors will need to be prepared for a continuation of rapidly changing market conditions.”

COVID-19 caused a refocus in the capital markets. “As priorities shifted toward preservation and survival, a proliferation of follow-on issuances took place across the market,” says Hannah Kendrick, a partner at Squire Patton Boggs. “Temporary measures were granted by regulatory authorities, giving listed companies more flexibility. These include the relaxation of Pre-emption Group Principles to support non-pre-emptive issuances by companies and a revised approach to working capital statements.”

Resurgence

The second half of 2020 was more encouraging. As summer became autumn, activity picked up dramatically. Q3 2020 saw a marked reversal of the downward trend, as liquidity flooded back into the IPO space, resulting in the most active third quarter in the last 20 years by proceeds and the second highest by deal number, according to EY. Globally, there was a 14 percent increase in the total number of IPOs to 872, and a 43 percent rise in proceeds to $165.3bn.

In the Americas, 188 IPOs raised $62.4bn in proceeds – an increase of 18 percent by number and 33 percent by value over the same period the pervious year. Asia-Pacific saw 554 IPOs raise $85.3bn in proceeds, a rise of 29 and 88 percent, respectively. However, while activity in Europe, the Middle East and Africa (EMEIA) rose quarter on quarter, IPO volumes were still down by 27 percent at 130, and proceeds by 24 percent at $17.6bn. Cross-border IPO activity levels held steady by deal number and proceeds, accounting for 8 and 10 percent of global IPO activity, respectively.

The uptick in IPO activity remained quite consistent through the second half of 2020, despite the macro factors which could have derailed it, such as stock market volatility, the threat of additional waves of COVID-19, and the US presidential election result, among others.

Despite broad economic challenges, a number of notable companies have gone public in 2020. These include Casper Sleep Inc, Lemonade, Inc, Snowflake Inc, Sumo Logic, Inc, American Well Corporation and Unity Software Inc. Furthermore, Palantir Technologies Inc and Asana, Inc went public via direct listing in September. Three of the best performing IPOs of the year were Dutch biotech CureVac, Snowflake and US healthcare company GoodRX, though all of them appeared to suffer from hyper-valuation through the year.

Technology boom

The tech sector has been a driving force in the IPO market – a trend accelerated by COVID-19. The pandemic has had a profound impact on the ways companies in almost all sectors and regions do business. It has pushed many companies to invest more in technology adoption. Moreover, changing consumer habits and the boom in e-commerce, virtual learning, streaming, telehealth and delivery services have been revolutionary.

According to McKinsey, many companies have accelerated digitalisation of their customer and supply-chain interactions, as well as their internal operations. With a quantum leap in digital adoption, at both the organisational and industry levels, it is unsurprising that tech companies are in great demand in the age of COVID-19.

According to EY, there were 85 technology company listings in the first half of 2020, raising a total of $16.9bn. Cloud-based business software companies have dominated fundraising in the new-issue market, as demonstrated by the September listing of Silicon Valley data-warehousing provider Snowflake, which reached a market value above $70bn. The company’s $3.36bn IPO was a record for a software company. Snowflake was one of many tech-based companies to seemingly benefit from the seismic change to working practices made in response to COVID-19, with lockdown and social distancing measures forcing people to work remotely.

Of the $102bn total raised on US exchanges to the end of September, technology firms have raised more than $12bn, according to Bloomberg. Cloud-computing, biotech and stay-at-home-focused companies have performed particularly well in 2020. This trend looks set to continue into 2021. Airbnb, which had originally intended to go public in 2020, is likely to launch its delayed public offering, among many other tech firms and start-ups.

In addition to the technology sector, industrials and healthcare were also among the most active sectors. Industrials saw 83 IPOs raise $9.6bn while healthcare had seven IPOs raise $15bn, according to EY. “The healthcare and technology sectors remain attractive sectors for investment and the ongoing digital transformation in healthcare has also created compelling investment opportunities,” points out Nina Driver, a practice development lawyer at Squire Patton Boggs.

“The recent AIM IPO of Kooth plc showcases how effective a combination of healthcare and technology can be and demonstrates the success of companies with a technologically innovative product offering,” she continues. “Kooth provides personalised digital mental healthcare through its online platform. With measures implemented nationally in response to COVID-19, such as self-isolation, shielding, social distancing and increased working from home, the IPO of Kooth serves a timely reminder of the importance of mental healthcare.”

Alternative access

Despite the successes seen in the tech and healthcare sectors, the rest of the IPO market experienced an understandably turbulent 2020. Intermittent market volatility relating to the pandemic and other geopolitical factors have encouraged more issuers to turn to alternative ways to access the public markets, notes Phyllis G. Korff, a partner at Mayer Brown. These primarily include special purpose acquisition companies (SPACs) and, to a lesser extent, direct listings. “Other activity in the second and third quarter may also be attributed to companies trying to complete transactions before the presidential election in the US, which although common in earlier presidential election years, seemed more critical in 2020,” adds Ms Korff.

While IPOs enjoyed a resurgence in the second half of 2020, SPACs have skyrocketed in the US, with a total of 119 newly public SPACs searching for targets. There has been a lot of interest among seasoned executives, private equity firms and investment banks, among others, in forming SPACs. Compared to an IPO, the SPAC process may be considered more efficient, more predictable and less expensive.

In the third quarter alone, 84 SPAC companies raised over $24bn, according to Triad Securities Corp. Among them, the two biggest were Churchill Capital Corp. IV, which raised $1.8bn, and Foley Trasimene Acquisition Corp. II, which raised $1.3bn.

“Going public through a SPAC merger may provide greater certainty with respect to valuation than undertaking a traditional IPO because the target company has the opportunity to negotiate with the sponsor and establish a value, rather than leaving valuation to market forces,” suggests Ms Korff. “It may also be faster than a traditional IPO, depending upon the speed of negotiations between the SPAC and operating company and the shareholder approval process. Also, for many targets, it may be slightly cheaper, although when one considers the lower underwriting discount plus sponsor compensation, dilution and fees to advisers, perception may be greater than reality.”

In 2020, several factors converged to elevate the status of SPACs: the volatile market for traditional IPOs, an evolution of SPAC terms to provide greater certainty of execution for targets, and publicity around several high-profile SPAC combinations.

“One of the key advantages of a SPAC is that it provides an efficient path to going public – the SPAC itself has already gone through the IPO process, and the target company is able to step into the public company status of the SPAC through a merger,” says Ms Duckworth. “Another key advantage is certainty of valuation. Unlike a traditional IPO, where the ultimate pricing of the offering varies based on market factors, in a SPAC transaction the target company can negotiate a fixed price per share with the SPAC.”

Executing IPOs in a pandemic

Traditional methods used to get capital markets deals done have also been forced to adapt. Due to travel restrictions and social distancing measures, virtual roadshows, for example, have become the norm, as company executives, rather than flying and meeting institutional investors face to face, conduct online presentations. High-profile companies such as Slack, Warner Music, JDE Peet’s and Vroom all held virtual roadshows.

“The IPO process has had to adapt to the new world in which business is conducted within the constraints of national lockdowns and social distancing, and consequently management teams are now leading virtual roadshows and must be able to engage with investors on an online platform,” says Louise Barber, a director at Squire Patton Boggs. “In the current financial climate, timing is critical, and the board needs to fully understand timetable restrictions within the IPO process so that any window of opportunity is not missed.”

While they may not be the preferred option for every company going forward, such as those with a low profile seeking cornerstone investors, remote roadshows on a videoconferencing platform can be a faster and more efficient way to reach a wider pool of potential investors. Removing the need for in-person meetings means company executives, analysts and investment banks may be able to provide information to investors more quickly, reducing the time companies need to put themselves out in the market.

“The pandemic has forced companies and others involved in the IPO process to adapt to remote working conditions,” says Ms Korff. “Many were surprised at how quickly we were able to do so. The bankers and senior executives we work with have mentioned they are relieved to have a compressed schedule of a three- or four-day virtual roadshow, compared to the extensive travelling over two weeks and dozens of in-person meetings that they were accustomed to. Some have also mentioned that there is greater institutional investor engagement. As face-to-face meetings are limited or even non-existent, large working groups have adapted quickly to working very efficiently remotely.”

As the crisis continues to evolve and the economy moves into the ‘next normal’, the IPO process may develop further. Some of the changes already seen are expected to last beyond COVID-19. Virtual roadshows may not replace in-person presentations altogether, and a hybrid between face-to-face and online meetings may become the long-term standard. Companies on the IPO trail will need to decide what kind of roadshow best suits their needs.

Preparation is key

Whatever the chosen method, when it comes to preparing an IPO it is imperative that management teams focus on factors within their control – most importantly, telling an attractive equity story to give themselves the best chance of achieving their desired valuation. “Investors expect the board to be able to showcase how the business is navigating the challenging economic landscape in conjunction with being able to demonstrate their strategic objectives and a compelling, sustainable investment story,” notes Ms Barber.

According to Ms Duckworth, the best thing companies can do in the current market is to be prepared in advance, so that they are well positioned to move quickly when a market window opens. “In the US, virtually all issuers take advantage of the ability to confidentially submit a draft IPO registration statement for review by the SEC, which allows the issuer to address comments from the SEC, and continue to evaluate the prospects for success of an IPO, before making a public filing.

“Companies should also be aware that the SEC has specifically focused on the importance of issuers providing disclosures regarding the impacts of the COVID-19 pandemic on their operations, liquidity and ability to access funding sources,” she adds.

Though there was some softening of the market in Q4 2020, the year ahead looks set to see many notable IPOs. Though COVID-19 continues to linger for now at least, companies can start taking steps to ready themselves for an opportune public offering.

© Financier Worldwide

BY

Richard Summerfield