Initial public offerings came to a sudden halt in March as stocks plummeted further into bearish territory and economists forecasted the worst recession in nearly a century.
After a month of near-complete silence, IPO activity roared back to life. Newly tradable firms - and their investors -paid little mind to coronavirus risks and weakened consumer demand. While the IPO landscape mirrored the stock market in its sharp rally, experts think different factors revived IPOs.
The resurgence was never going to be led by one massive deal, David Ethridge, US IPO services leader at PwC, said. It's difficult to find precedent for blockbuster IPOs, and investors struggle with pricing such offerings. Instead, a smattering of IPOs from small and profitable companies gave investors something familiar and broke the ice for other debuts, he said.
"When we look back on it, there were two, three deals in a row there that I think helped build confidence," Ethridge told Business Insider in an interview. "If you could do the see-no-evil, hear-no-evil, speak-no-evil thing and not look at the economic data that's out there, you'd say the IPO market is back."
Others see a time crunch driving the market into a frenzy. Several companies put off their debuts in 2019 after seeing massive IPOs falter in their first days of trading. The pause generated "pent-up demand for IPOs and pent-up supply of companies that delayed theirs," Kelly Rodriques, CEO of private-equity platform Forge, said.
Many of those same firms are now racing to go public before the 2020 presidential election. A change in leadership could usher in new tax regimes and quash investors' risk-on attitudes.
"Now I think you're going to see a jam and a lot of companies try to make a move," Rodriques said. "If you're not going to make one before November, then you better be prepared to stay private potentially for a longer duration than planned given the election."
Ethridge echoed the projection for stronger-than-expected demand. IPO activity is already trending back to an average year, he said, with about 85 expected to be completed by the end of June. An average year yields between 150 to 175 IPOs, placing the US market back on track despite its March slump.
"This is not going to be an '08-, '09-terrible year. This is going to be good-to-very good," Ethridge said. "I do think there's some chance that demand outstrips supply for a while."
Like most things affected by the coronavirus, the IPO market will exit the pandemic with lasting changes. The roadshows where companies pitch their stock have turned digital. Where one company would spend hours traveling from pitch meeting to pitch meeting, firms have seen similar success hosting a single pitch call and following up with investors afterward, Ethridge said.
"They've had very short roadshows with very high hit ratios, meaning if you had 10 meetings, you got nine orders," he said. "It's very efficient for management teams and for the investors themselves, as long as the investors are willing to invest in a company where they haven't met management face-to-face."
Companies looking to go public are also seeing a pickup in cornerstone investors, or those who had already invested and dip in again during the IPO. The increase in such enthusiastic buyers created "momentum for other people to feel like, 'okay, we should also participate,'" Ethridge said.
The IPO market isn't completely out of the woods yet. Both Ethridge and Rodriques cautioned that the broader market's optimism toward a V-shaped recovery could bite back at firms aiming to go public. Public companies largely pulled forward guidance in the first quarter as they faced down vast uncertainties tied to the coronavirus. A major miss in second-quarter earnings could spark a re-coupling of recession risks with stock valuations, Ethridge said.
For some, the return of stock market risk-taking is enough to soothe concerns.
"Second wave or no second wave, people are trading again," Rodriques said. "As far as IPOs go, yeah, this is going to be an exciting next several months."
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