The year 2020 has brought a lot of surprises: a global pandemic, an economic downturn, millions of jobs lost, and withdrawal of American leadership from the global stage. But it hasn't slowed down the initial public offering (IPO) momentum and those looking to profit from IPOs.
- This year's record IPO activity could rival the IPO frenzy of the dot-com era of the late 1990s.
- Despite political and economic uncertainty, U.S. exchanges are still leading IPO activity in terms of the number of deals and total proceeds.
- Investors have favored special purpose acquisition companies (SPACs) as a vehicle of choice, focusing on cloud-based computing companies and pandemic-proof businesses, even as Chinese companies may move away from U.S. listings.
In fact, 2020 could turn out to be both the biggest year ever for IPOs as well as one of the most innovative years in terms of the increasing reliance on SPACs and direct listings. The U.S. exchanges have accounted for the vast majority of these IPOs, making up 82% of deals and 87% of proceeds in the third quarter of this year, according to the Global IPO trends: Q3 2020 report published by Dealogic and EY on Oct. 14.
"Although the market sentiments can be fragile, the scene is set for a busy last quarter to end a turbulent 2020 that has seen some stellar IPO performance," said Paul Go, EY global IPO leader.
Globally, the third quarter was the most active in the past 20 years by proceeds and the second highest third quarter by deal numbers, according to the EY quarterly report. EY analysts found that market liquidity and investor sentiment were key to driving IPO activity this year, with technology, industrials, and health care accounting for 537 IPOs and raising a total of $110.5 billion so far this year.
Some of the most prominent IPOs so far this year included Casper Sleep Inc. (CSPR), Lemonade, Inc. (LMND), Snowflake Inc. (SNOW), Sumo Logic, Inc. (SUMO), American Well Corporation (AMWL), and Unity Software Inc. (U). In addition, Palantir Technologies Inc. (PLTR) and Asana, Inc. (ASAN) went public via direct listing in September.
Overall trends include the rise of the SPAC vehicle, the prominence of cloud-based companies and consumer tech, and a couple of significant companies going public through direct listing this year. The IPO market hasn't been entirely immune to politics: we've also seen several Chinese companies that previously may have listed in the United States flock back to China.
The popularity of so-called special purpose acquisition companies (SPACs) continued to rise in 2020, even though they've existed for decades. SPACs, which are also referred to as "blank check companies," have no commercial operations, usually feature big-name underwriters and investors, and are set up to raise money through an initial public offering to buy another company.
In the third quarter alone, 84 SPAC companies raised over $24 billion, according to a report by Triad Securities Corp. Churchill Capital Corp. IV, which raised $1.8 billion, and Foley Trasimene Acquisition Corp. II, which raised $1.3 billion, were the two biggest SPACs in the third quarter, according to the report. Willian Ackman's Pershing Square Tontine Holdings Ltd., which raised $4 billion in July, remains the biggest SPAC to date.
SPACs have represented a considerable chunk of total IPOs this year. As of Oct. 2, estimated 46% of the total amount raised in IPOs this year was via SPACs, according to analysis by Marker citing Dealogic's data. Electric vehicle startup Nikola Corporation (NKLA) and fantasy sports company DraftKings Inc. (DKNG) are among high-profile companies that have gone public this year through SPAC mergers.
Another trend that has emerged so far this year is the prominence of cloud-based names among the companies that have become public. In September, Snowflake became the biggest IPO for a software development company. Israeli company JFrog Ltd. (FROG), which allows companies to release software upgrades to all their users and/or employees, also debuted last month.
We've also seen an IPO from artificial intelligence (AI) software developer Sumo Logic, which provides cloud monitoring and analysis tools. "Sumo Logic's positive reception from public markets, the first major cybersecurity IPO of 2020, signals an increasing appetite for cloud-focused services," according to analysis from CB Insights.
In addition to cloud computing, biotech, and health care names, investors flocked to companies that are well positioned for weathering the pandemic. "High-quality companies came public in the third quarter, and investors, still recovering from the pandemic-induced sell-off earlier in the year, snapped them up," said Triad Securities Corp. analysts in their quarterly report.
Airbnb plans to go public through a traditional IPO later this year, according to CNBC, despite the setbacks caused by the COVID-19 pandemic for the travel and hospitality industry. DoorDash is set to IPO in the fourth quarter as well, according to Bloomberg. Companies like DoorDash and Instacart have benefited from a work-from-home environment. Epic Games and Instacart have not yet set dates for their IPOs.
Given the volatile state of U.S.-Chinese relations, the allure of U.S. exchanges for Chinese companies has been uneven. In China itself, the IPO market is booming. IPO deals jumped 152% in the third quarter, and proceeds grew 139% compared to the year before, according to EY report.
"As U.S.-China trade tensions heightened leading up to the U.S. presidential election, some Chinese companies listed on U.S. exchanges chose to conduct a secondary listing on the Greater China exchanges, tapping into the Chinese equities market," EY analysts noted.
Ant Group, the Chinese fintech giant co-founded by billionaire Jack Ma, will be listing in Hong Kong and Shanghai. The company, which has played an important part in China's digital payments innovation, is expected to raise $30 billion.
The Bottom Line
Despite a global pandemic, an election year, and many uncertainties, the IPO momentum of 2020 isn't done yet. Airbnb, Robinhood, and DoorDash are among the high-profile companies expected to go public in the fourth quarter.