- Initial Public Offering (IPO) volumes are set to hit a new record in 2021, offering investors higher return potential than traded equity, albeit with higher risk. But investing in the right IPO depends on more than just geographical location and sector. Within the first nine months of 2021, the volume of global IPOs has already exceeded the whole issuance seen in 2020, with the Americas and Asia-Pacific (excluding Central Asia) accounting for more than 75% of the total capital raised and China (29%) and the US (30%) being the main contributors. These numbers are even more impressive since they exclude the 2020-2021 SPACs (Special-Purpose Acquisition Company) market rush .
- The market acceleration is hardly surprising as the ultra-high equity valuations, due to ever-increasing equity prices, create the perfect landscape for companies to go public. Most IPO-intensive equity sectors (e.g. information technology) are currently trading at 20-year high multiples, with the Eurozone having now outpaced the US and the world aggregate. At the same time, emerging markets are struggling to keep up due to diverging economic conditions and the Chinese legislative crackdown.
- This historically low-rate environment, high equity multiples, improving macroeconomic outlook and implicit central bank “whatever it takes” put protection set the stage for a continuing IPO acceleration. Nevertheless, there are some risks to keep in mind: IPO candidates tend to be particularly sensitive to changes in interest rates, given their relatively long cash flow duration (IPO candidates pay more of their cash flows in the long-term future rather than in the present), and remain extremely vulnerable to equity market volatility. Hence, if interest rates were to abruptly rise (e.g. due to a policy mistake, persisting inflation, etc.), or equity markets were to revert from the current bull run (e.g. due to exogenous factors, change in risk appetite), IPO markets would close shop extremely fast. In fact, periods of extreme negative market performance in 2000-2002 and 2008 led to a substantial shrinking of the IPO market for the next one to two years. However, we do expect equity markets to avoid a meltdown and converge towards long-term average returns. In this context, the IPO wave is far from over but should moderate in pace and size.