A traffic congestion in a tunnel during the morning rush hour. That’s what it seems these days, at the entrance of the stock exchange. Companies all want to make their entrance at the same time. That causes traffic jams… and accidents. Where does that rush come from? Is it a bad sign? How does Econopolis view IPOs?
Record year for IPOs
Busy, busy, busy at the entrance of the stock market in recent months. Not the least are many private equity funds that still want to monetize their investments quickly. Admittedly, the time frame in which IPOs can take place is limited in any case. In the summer, most of the brokers accompanying the IPOs rest by the pool, and from mid-December, institutional investors no longer take large positions. But this time there is more to it. The US central bank's tapering – the phasing out of bond purchases – hangs over the trading floor like a sword of Damocles. Because once the Federal Reserve cuts its purchases, interest rates could bounce back, often ruining the celebrations. Anyone who has plans for a stock exchange listing, therefore, rushes to the cash register. Is that haste justified? Yes and no. When the music stops, of course nobody wants to be the brute who doesn't have a chair anymore. Due to the high stock market valuations, investors therefore suffer from some fear of heights, and a significant correction cannot be ruled out. In such circumstances, they may be less eager, and companies preparing to go public will have to settle for a lower initial price, or worse. Yet we cannot be blind to the enormous flows of money that are still looking for a profitable destination. The continuous flow of new money that the central banks create will certainly not dry up overnight. Should the Federal Reserve actually decide on November 3 to slow down the money press, it will do so gradually, in eight monthly increments of $15 billion, until the $120 billion in cash – the amount it now buys monthly in bonds – falls to zero. It remains to be seen whether she will carry through her plan to the end. Once interest rates rise too much or the economy slows severely, the tapering plans may be put on hold. In a worst-case scenario, inflation will flare up further, and central banks will have to (reluctantly) raise their base interest rates. We are not there yet, but it cannot be ruled out. That would put a brake on the economy, and then on corporate profits and stock prices. Companies therefore prefer to play it safe today and join the long queue. Some numbers from JP Morgan: - Capital raised by IPOs in the US from early this year to mid-October is $231.2 billion. That is 50% higher than the amount raised in the whole of 2020. - A new record was set during the first quarter: the companies raised a total of 130 billion dollars. After that, the crowds eased a bit, to more than $46 billion per quarter. - The counter stands at 749 IPOs so far, well above the 423 deals in 2020. - An important part of the IPOs went through so-called Special Purpose Acquisition Companies or SPACs. These are companies with the sole purpose of raising capital on the stock exchange, in order to find a private company with which it can merge and dissolve itself. The rules for SPACs are more flexible, so that a company can be listed on the stock exchange faster and easier than with a classic IPO, which partly explains its popularity. This year, 466 SPACs worth USD 132 billion went public. In 2020, there were just 248, at a cost of $83 billion.
How does Econopolis view IPOs
Econopolis participates very selectively in the IPOs. After all, there is a lot of chaff among the wheat. And of course, we assess an IPO in the same way as a listed company: we look critically at the sector, the market position of the company, the financial health, the quality of the management, the reference shareholders, the composition of the board of directors, and last but not least the appreciation. This is where the shoe pinches: companies often come to the stock exchange at a flattering price, while the available information (such as their track record) is on the meager side. That makes it more difficult to make a sound judgement. Incidentally, an IPO often puts professional investors , such as fund managers, insurers, banks , in a catch-22 situation. A less attractive IPO gives them all the shares, while they must be content with a mere penny when it comes to an IPO gem. Another reason why we are not always enthusiastic is that we prefer not to be saddled with less liquid (tradable) shares. With many IPOs, the free float (the percentage of shares that can be freely traded on the stock exchange) is rather small, making the shares even less tradable and therefore more volatile. That is not very attractive to professional investors. Please note that once the companies are listed, we do monitor them at Econopolis. Because gradually there is transparency in the figures, and more and more analyst studies appear. There is a consensus and a fork of valuations that we can then compare. That gives us enough material to thoroughly evaluate the company. Also allow us to dispel the myth that you'll get rich overnight by subscribing to an IPO and selling immediately on the first day of listing. This phenomenon is called 'Flipo' or Free Lunch with IPO. Be careful though, you could end up screwed up. Often companies have a false start. It's timeless, and it's certainly not just about eternal stock market bruises. Coca-Cola went public in 1919. A year later, the stock was trading at half price. The same with biotech company Amgen, which took the step to the stock market in 1983, and in the first years led a poor life at the bottom of the stock market. Microsoft made its entrance in 1986, Google (now Alphabet) in 2004 and Facebook in 2012. In none of those cases it was fireworks from the first hour. Facebook went public with many bells and whistles at $38 a share, amid great interest from small investors for whom the company was a household name. Unfortunately, a week later the stock was already 26% lower. It wasn't until Facebook had devised a clear mobile strategy that it returned to investor favor. You know the rest of the story.
Equity Analyst in the Econopolis Wealth Management team