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Where to from here with IPOs?

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08 Sep 2020 05:09:17 GMT9
Cornelia Meyer
08 Sep 2020 05:09:17 GMT9

When stock markets are buoyant, companies like to raise capital on them. The rally that most markets displayed since March served as an invite for many firms, mainly in the tech space, to do an initial public offering (IPO). Whenever markets are high, hubris is never far away.

During the height of the dotcom bubble, as many as 2,292 companies listed between 1996 and 2000. This year, in the US alone, 72 companies announced plans to list in July and 66 in August. The businesses filing a prospectus last week included Snowflake Inc., Unity Software Inc., and Sumo Logic Inc. Palantir and Airbnb are waiting in the wings, while Asana opted for a direct listing. More than 150 companies, which have announced an IPO, have yet to execute.

According to Bloomberg, the largest 17 IPOs have so far raised more than $1 billion each, totaling $19.2 billion. The companies that listed have on average fared well with their share prices, raising 45 percent from the IPO price.

But the above-mentioned does not include non-US IPOs: Just to name one, investors are eagerly awaiting a blockbuster dual listing of Alibaba’s payment arm Ant Group on the Hong Kong and Shanghai stock exchanges. Chinese business magnate Jack Ma wants to raise $30 billion, bringing Ant group’s valuation up to $225 billion.

There is big appetite for Chinese growth stocks, reflected with listings doubling on mainland China compared to last year raising $31 billion through the first eight months of the year, which constitutes a record since 2010.

In the UK, Hut Group aims to raise £920 million ($1.2 billion) giving it a valuation of £4.5 billion, while China Pacific Insurance had raised £1.6 billion in London in June.

London cannot compare to the US. This year only saw 13 listings compared to 25 last year and 58 in 2018. Among the companies which have gone to the market so far, eight listed on the FTSE and the remainder on the chronically illiquid junior AIM market.

There are a few lessons to learn from the aforementioned statistics.

Firstly, in the US, most of the listings took place in the technology, communications, and biotech/health care spaces. This was no surprise given the bull market of the Nasdaq which despite being down significantly on Thursday/Friday was still up close to 50 percent year to date. This bull market prompted many companies to list now.

Secondly, last week’s correction may have an impact on how many firms will eventually list. What happens over the remainder of the month will provide a clearer picture.

Thirdly, the US and China lead when it comes to IPOs, because they have the most interesting companies in the technology space on offer. Ma’s reluctance to list on a US exchange, as he did with Alibaba in 2014, has a lot to do with current US-China tensions. The upcoming forced sale of TikTok’s US operations did not help instill confidence in Chinese companies to list in the US — in spite of the Nasdaq, the S&P 500 and the Dow Jones being among the world’s most liquid stock markets.

Where we go from here depends on where the Nasdaq, the S&P 500 and Co. go. It also depends on how investors view the risks involved in the presidential election, whoever wins. The unpredictability of a US President Donald Trump White House weighs on investors’ minds, as does the risk of financial transaction taxes under his Democratic rival Joe Biden.

All in all, the unfolding events have proved that issuers were able to navigate the vagaries of the coronavirus disease (COVID-19) pandemic and related lockdowns with virtual roadshows and the like.

It also showed that investors were ready to benefit from companies going public, despite being more or less confined to their homes. If anything, the fact that there was little else to do might have helped them to focus more on their stock portfolios.

There is hubris in what has unfolded on the IPO market for sure. However, it would be wrong to compare 2020 to the tech bubble of the late 1990s, because many of the companies which have listed or are going to list are already profitable. To a certain degree, at least one is dealing with proven business models in a new brave age of technology and not with promise alone.

For the rest of it: Stock markets have always been for the bold and never for the faint-hearted.

• Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources. Twitter: @MeyerResources

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