Initial Public Offerings (IPOs) have been sizzling as of late. This strong demand for new stocks is illuminated with the debut of cloud companies such as Snowflake and JFrog. Experts say the Federal Reserve’s decision to hold interest rates at zero for the foreseeable future has ignited the demand for IPOs while accelerating the overall stock market and, in particular, high growth techs. Troy Hooper, head of IPO content at Mergermarket, stated, “IPOs are doing well and I guess that’s what happens when you have the Fed pumping money into the financial system. The money has to go somewhere.”
Companies have been merging with SPACs to go public. The sudden surge in SPACs (special purpose acquisition companies) reflects investors’ search for better returns in a low-rate world. A SPAC is an investment vehicle that goes public despite having no real business. The operating model is to raise money from investors and subsequently use it to buy into another company. Over 40% of 2020’s IPOs by volume have been SPACs, raising $31.6 billion. This is more than double all of last year’s volume of $12.4 billion.
According to Evan Ratner, Managing Director and Portfolio Manager of SPAC strategies at Levin Easterly Partners, in 2020 alone, there have been approximately 100 SPAC deals that have raised approximately $35 billion. That is a significant increase from merely 59 SPAC transactions that raised $13 billion in total for all of 2019.
This blank check explosion has been set in motion by the collision of two major trends. The first trend is historically low interest rates. With the onset of the pandemic, safe bonds have been paying less than 1%, and stocks have begun trading at high valuations. This has generated an increased amount of investors to place their money in SPACs with the hopes that they are investing in an acquisition that will ultimately pay off in the end. The second trend leading to the blank check swell is the long-running boom in private equity and venture capital. Investors who deluged money into buying companies over the past decade want to cash in by selling them, thereby, making available several companies for SPACs to purchase. Businesses such as Luminar Technologies, Inc., a Peter Thiel-backed company that develops the sensor technology behind driverless cars, have brought about particular investor interest. Luminar recently declared plans to merge with a SPAC on August 24th.
Many companies have also taken the route of direct listing. This avenue allows a company to bypass the lengthy Wall Street roadshow and skip the series of meetings with prospective investors. Spotify (SPOT) and Slack (WORK) went public this way. There is mounting anticipation that big “unicorn startups” will aim to go public in the coming weeks to get their stocks trading before the election. This sentiment comes following the potent debut for Snowflake, which more than doubled on its first day.
Palantir, a Big Data firm, went public on the New York Stock Exchange on September 29th, 2020. Furthermore, GoodRx, a drug price comparison company, and Asana, a collaboration software developer, are also expected to begin trading prior to the close of the month.
“It will be interesting to see what happens with Palantir and Asana. There is increased interest from wealth managers in tech unicorns after Snowflake,” said Phil Haslett, Co-Founder and Chief Revenue Officer at EquityZen, a company that allows investors to buy pre-IPO shares of private companies.
Of note, the Securities and Exchange Commission has been determining whether to approve a new rule that will allow companies to also raise new money by directly listing their stocks. Additional companies could go public via direct listings if they are permitted to list shares and produce cash simultaneously.
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