What’s Next for the IPO Market?
Companies spend anywhere from months to years preparing to launch an initial public offering. Many companies who were ready to go public this spring had to suspend their IPO due to reasons stemming from the COVID-19 pandemic. Record high volatility in the market has caused companies like AirBnb and DoorDash to push off their IPOs. These suspensions have left investors wondering when they will get their next fix of new stock.
2019 proved to be a solid year for IPOs ,with companies such as Lyft, Beyond Meat, and SmileDirectClub all going public. Renaissance Capital, an investment bank that tracks emerging companies and provides IPO focused ETFs , had their renowned IPO ETF beat the market and return 35% in 2019, proving a sense of stability and strength within the IPO market. Emerging companies like Robinhood, Instacart, and many others took note of this and have planned their IPOs for 2020.
The list of impacts from the coronavirus within the financial sector is growing daily with one of countless impacts being the status of the IPO market. The economy has yet to feel the lasting impact from the coronavirus but many investors are wondering how long this IPO drought will last. Many recall the IPO droughts from 2000 and then again in 2008 and may project their expectations for the current IPO market from their experiences in the past. After a strong 2019 showing, Renaissance’s IPO focused ETF fell 31% from mid-February to late March, worse than the S&P 500’s 24% drop in that period. The principal at Renaissance Capital argues, “[The IPO market] may essentially shut down for months.” Such a shutdown would leave the 2020 IPO market at a drastic decrease from 2019. Renaissance also added, “The 28 IPOs conducted this year represent a 17.6% decline year-over-year: total proceeds of $7.2 billion compared to nearly $9.6 billion by the end of April 2019.” Also, the public companies that have had offerings this year have had rather disappointing debuts, such as Velocity Financial and Casper Sleep. In its initial rounds of funding in 2019, Caspers’s valuation was upwards of $1.1B, however once they went public this past February their valuation dropped below $500M due to the unanticipated low share price of $12. In their further evaluations, Renaissance Capital also claims that a consistent volatility under 30 and improved stock performance are two key indications that the IPO market may be ready for companies to start going public again. The Volatility Index, or the VIX, represents the expected volatility in the market in the upcoming 30 days. Experts at Renaissance believe that when the market and volatility indexes begin to experience less sporadic movement, the IPO market will begin to bulk up again. As the economy continues to reopen it is certainly possible that we could see offerings in the fourth quarter, but the IPO market may look different.
When volatility flattens out to a stable rate and market performance improves, the IPO market may look different for 2020’s proposed lineup of companies. The COVID-19 pandemic has put an emphasis on cleanliness and contact tracing in order to slow the spread of COVID-19. A company like DoorDash, one who had plans to go public this year, hires drivers to pick up an order, place it in their car, and hand deliver it to the client. This may not have raised eyebrows a year ago; but with the new emphasis on social distancing and cleanliness, investors may be hesitant when contemplating purchasing new shares of that company. On the other hand, DoorDash may have an unparalleled opportunity given the current crisis. With consumers stuck at home recently and restrictions put on opening restaurants, demand for delivery is at all time highs. This increase in demand could lead to a successful IPO for DoorDash in the future. Secondly, many individuals have ceased traveling due to government restriction or their own cautiousness for protecting their health, ultimately avoiding renting through AirBnB. As restrictions are eased, individuals will return to traveling at their own discretion, however the properties on AirBnb are owned and cleaned privately. This may cause a user to lean towards a mainstream hotel with an eye on cleanliness. Emerging companies must be wary of this new wave of consumer behavior as their specific industries continue to reopen and their individual companies plan to go public. While many postponed IPOs may have a mass of restrictions clouding their impending big day, there are companies using the virtual nature of today’s interactions and raising large amounts of capital.
VAST data recently reached unicorn status, meaning they are a privately-owned company with a valuation of over $1 billion. “Part of VAST recipe for unicorn success in a pandemic could be the nature of its business. The data-storage start-up counts the life sciences sector among its customers, including the National Institutes of Health.” Reaching that valuation in a time where face to face interaction is not possible, regardless of who your customers are, shows the IPO market’s adaptation to this unprecedented economic circumstance.
COVID-19 has postponed many IPOs and will have lasting impacts on companies looking to go public in the future. Many companies will have to adapt to new regulations reacting to the pandemic. That being said, it is likely that we will see companies following in VAST data’s footsteps and taking their roadshows virtual. The reopening of the economy and consistently low volatility will be crucial in order for the IPO market to reopen. With consumer behavior trending on the side of cleanliness, many companies who were scheduled to go public this year may have their hands full with new regulations and consumer needs that they must cater to when the time comes.
