The IPO market built on 2Q momentum and completed its best quarter in at least five years during 3Q20. Key drivers included the usual suspects -- Cloud-based companies, Unicorns -- as well as an emerging factor, SPACs.
IPO activity jumped 87% quarter-to-quarter in 3Q, after rising at an 80% clip in 2Q. By the numbers, 86 operating companies raised funds through IPOs in 3Q20, up from 46 in 2Q and from 38 a year ago. Including SPACs, 165 entities raised funds. Secondary offerings were also 34% higher year-over-year in 3Q20, though they were down 21% quarter-to-quarter as companies continued to tap the public equity markets to strengthen balance sheets that have been strained by the pandemic.
High-quality companies came public in 3Q, and investors, still recovering from the pandemic-induced sell-off earlier in the year, snapped them up. Cowen and Company issues had the best returns in 3Q20, based on our analysis of the underwriters. Cowen was a syndicate leader for 14 issues that on average opened 55% above the offering price. Piper Sandler was second, with 17 issues that on average opened up 50%. In third place was Barclays Capital, with 16 issues that opened up on average 47%. Full details on underwriter performance can be found in Table 4 of this report.
Investors favored industries that appear well positioned to thrive on the other side of the pandemic, such as Biotech, Healthcare, and Cloud-Based Connecting Platforms from the intersection of the Tech and Communication sectors. The ratio of positive issue-opens to negative issue-opens was 2.5:1 in 3Q, down from a ratio of 5:1 in 2Q but up from 2:1 in previous quarters.
Remarkably, seven companies more than doubled on their first trading day.
Investors also had intense interest in innovative Technology companies such as:
But investors were not rewarded by every IPO company that seemed to be well positioned for the post-pandemic environment. Sun Biopharma Inc. (SNBP), a biopharmaceutical company focused on treating solid tumor cancers, opened 20% below its offering price in a deal led by Craig-Hallum Group. VIA optronics AG (VIAO), an electrical component company, opened 20% below its offering price in a deal also led by Craig-Hallum Group as well as by Berenberg Capital Markets. And, finally, Rackspace Technology Inc. (RXT), a multi-Cloud technology services company, opened 20% below its offering price in a deal led by Goldman Sachs, Citigroup, JP Morgan and RBC Capital Markets.
Amid the activity, Unicorns returned. Some 10 Unicorns (privately held companies valued above $1 billion by venture capitalists) came public in 3Q: Snowflake Inc. and CureVac B.V., which we detailed earlier; as well as Sumo Logic (SUMO), Jfrog Ltd. (FROG), GoodRx Holdings Inc. (GDRX), KE Holdings Inc. (BEKE), Chindata Group Holdings Ltd. (CD) and XPeng Inc. (XPEV). All were successful -- up on average more than 60% -- in contrast to the poor receptions in recent quarters for formerly high-flying but unprofitable companies such as Lyft Inc. (LYFT), Uber Technologies Corp. (UBER), SmileDirectClub (SDC) and WeWork (whose public offering never got off the ground).
Demand for SPACs was almost as strong as demand for Unicorns. During 3Q, 84 Specialty Acquisition Corporations (SPACs) raised more than $24 billion. SPACS are companies that have no real operations and are formed to raise capital in an IPO. That capital is then used to acquire operating companies. Two recent SPAC success stories include DraftKings Inc. (DKNG), which went public in April 2020 via a reverse merger with SPAC Diamond Eagle Acquisition Corp. and now has a market capitalization of $20 billion; and Virgin Galactic Holdings Inc. (SPCE), which was brought public through a merger with SPAC Social Capital Hedosophia in July 2019. That SPAC raised $800 million, and the company is now worth $4.4 billion. The biggest SPACs in 3Q20 included Michael Klein’s Churchill Capital Corp. IV (CCIV.U), which raised $1.8 billion; and Foley Trasimene Acquisition Corp. II (BFT.U), which raised $1.3 billion and is focused on fin-tech companies.
We have not been particularly surprised by the strength in the IPO market in recent quarters. As we noted in our 1Q report, during the depths of the COVID-19 bear market, raising and allocating capital are among this nation’s core competencies, and the U.S. is a global leader in the industry. Also as expected, nvestors with longer time horizons are again willing to invest in financially strong and well-managed biotech, genetic and Cloud-based companies.
The stock-market environment (a key indicator for IPOs) was bullish for much of 3Q, as states started to reopen their economies and the unemployment rate declined. The Federal Reserve has stepped up to support markets, with numerous programs backstopping everything from money market mutual funds to corporate bonds. But as the summer wound down, volatility started to increase again. Congress and the Trump administration have failed to agree on another fiscal stimulus program to support the economy, and the employment trend may reverse. The presidential election looms in November, and an open Supreme Court seat has raised the stakes even higher. Stocks don’t perform very well in the fourth quarter of presidential election years, and the uncertainty may slow IPO activity a bit. In addition, the U.S. and Europe are girding for another wave of COVID-19 as winter approaches and people spend more time indoors.
Looking into 4Q20, we think the market for IPOs will remain strong, though seasonal factors typically emerge late in the quarter as the holidays arrive. The IPO pipeline is down slightly from recent quarters, with about 93 companies having filed with the SEC (about 160 including SPACs). But there are a number of interesting recent filings, such as solar energy company Array Technologies Inc. and cancer-detection company Grail Inc.
In addition, there are still some promising blockbuster Unicorns in the pipeline, including autonomous driving company Waymo, which had been valued at $30 billion; hospitality company Airbnb, which had been valued at $18 billion; and Stripe, a credit-card processing company serving websites, which had been valued at $36 billion. These companies by now have likely learned from Uber and others that they should be showing profit projections and offering quality ownership terms during their road shows.
In the tables on the following pages, we highlight select companies that our team of analysts thinks may be poised to enter the IPO markets at potentially attractive prices.
John Eade, President, Argus Research Jasper Hellweg, Security Analyst
Table 1 features the Argus Top 20 Promising Potential IPO candidates. This list has been selected from companies that have already filed S-1s with the SEC. It is based on factors that Argus believes are important for success in an IPO, including sales and earnings growth, a clean balance sheet, brand names, attractive industries, and experienced management/ownership.
Table 2 is our Top 20 intriguing venture-backed private companies, including Unicorns. This list includes companies in emerging industries such as cybersecurity and Big Data analytics, as well as companies whose investors include well-known groups such as Kleiner Perkins and Andreessen Horowitz.
Source: www.sharespost.com; cbinsights.com; The Billion Dollar Start-up Club; www.techcrunch.com; www.crunchbase.com; www.wsj.com; www.bloomberg.com; www. fool.com; www.pitchbook.com; Argus Research.
Table 3 shows the performance of the largest 3Q IPOs, and Table 4 is our ranking of underwriters, based on deals done and performance generated.
Data sources: Bloomberg, Triad Securities. Recent Prices as of 9/25/2020
Table 4 is our ranking of underwriters, based on deals done and performance generated.
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