By the end of 1Q, there were no gatherings in the country of more than 10 people. There also was no travel, and no roadshows. And so the IPO market, like much of the rest of the country, shut down in the second half of March.
Still, despite the sharp slowdown at the end of the quarter, there were more IPOs issued in 1Q20 than in 1Q19, when the federal government shutdown and trade wars with China, Mexico and Europe dampened activity. Quarter-to-quarter, though, IPO activity was down substantially. By the numbers, 24 companies raised funds through IPOs in 1Q20, up from 21 a year ago but down from 38 in 4Q19. Secondary offerings were similar, down 10% year-over-year and quarter-over-quarter in issues, as 135 companies raised additional funds in 1Q20.
IPO Investors were focused on quality, with the ratio of IPOs with positive first-day returns staying the same quarter-to-quarter at 2:1. Unicorns were rare.
The bright spots in the quarter were primarily in Healthcare. Investors bid aggressively for oncology companies such as Black Diamond Therapeutics Inc. (BDTX), which opened 74% above its issue price in a deal led by JPMorgan, Jefferies & Co. and Cowen and Company; and Revolution Medicines Inc. (RVMD), which was up 66% and was led by JPMorgan, Cowen and SVB Leerink. They also favored genetics companies such as Schrodinger Inc. (SDGR), which was up 53% and led by Morgan Stanley, BofA Securities and Jefferies & Co.; Beam Therapeutics Inc. (BEAM), which was up 42% and led by JPMorgan,Jefferies and Barclays Capital; and Passage Bio Inc. (PASG), which was up 24%, and led by JPMorgan, Goldman Sachs and Cowen. There was even a company from the unglamorous boat retail industry, One Water Marine Inc. (ONEW), which was up 25% and led by Raymond James, Baird and ST/Robinson Humphrey.
Not every Healthcare IPO rewarded investors. IMARA, a clinical-stage biopharma company focused on rare diseases, opened 13% below its offering price in a deal led by Morgan Stanley, Citigroup and SVB Leerink. The bad-timing award went to Muscle Maker, which runs fast-casual restaurants specializing in healthy-inspired food. The GRIL shares opened 6% below the offering price and now trade in penny-stock territory at around $2. While on the topic of struggling foodie IPOs, one-time Wall Street darling Blue Apron Holdings Inc. (APRN) has now spiked from $2 territory (before the nation’s restaurants were shut down) and is again trading above $10 -- which was the IPO price.
The Unicorn trend appears to be winding down. Only two Unicorns (privately held start-up companies valued above $1 billion by venture capitalists) came public in 1Q: Casper Sleep Inc. (CSPR) and 1Life Healthcare Inc. (ONEM). Both were successful -- up on average 29% -- 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), Peloton Inc. (PTON) and SmileDirectClub (SDC). Looking ahead, we do not expect much of an investor appetite for cash-burning Unicorns in 2020.
Cowen and Company issues had the best returns in 1Q20, based on our analysis of the underwriters. Cowen was a syndicate leader for four issues that on average opened 50% above the offering price. Jefferies & Co. was second, with seven issues that on average opened up 30%. Citigroup was involved with the largest number of deals -- 10, which on average opened up 7%. Full details on the underwriter performance can be found in Table 4 of this report.
The stock-market environment (a key indicator for IPOs) was the most volatile in years, as significant parts of the economy were shut down in order to stop the spread of the coronavirus. In February, the major market indices set all-time highs. By mid-March, as much of the nation was starting to shelter in place, the S&P 500 was down 32%. The VIX volatility index spiked from 12 to 85 -- the highest level since the Financial Crisis of 2007-2009. To get the economy moving again, the Federal Reserve has cut interest rates to zero, is planning to conduct hundreds of billions of dollars’ worth of bond buybacks and is backstopping numerous segments of the credit markets. Congress and the Trump administration are looking to spend at least $2 trillion -- 10% of U.S. GDP -- to lift the country out of recession. The Argus Economics team forecasts two quarters of deep recession, before the economy starts to grow again in 4Q20.
So while the IPO market may have shut down, along with restaurants and retailers, that does not mean it is not essential to the U.S. economy. Raising and allocating capital are among the nation’s core competencies, along with researching and developing medicines, generating technology innovations and building high-tech weapons. When will the IPO and secondary markets reopen? We think secondaries will be the first to come back to market, as companies from hard-hit industries such as Travel, Retail, Restaurants and Energy look to raise capital. Down the road, we think investors will again be eager to snap up biotech and genetic companies. The IPO pipeline is up from recent quarters, with about 100 companies having filed with the SEC. Our analysts see a number of interesting recent filings, such as biotech company Keros Therapeutics Inc., cloud-based marketing company Zoominfo Technologies Inc., and footwear company Cole Haan Inc. Several Chinese companies look interesting as well, including used car company Meili Auto Holdings Ltd., and human capital management company CDP Holdings Ltd.
What’s more, there are additional blockbuster Unicorns in the pipeline, including autonomous driving company Waymo, which had been valued at $30 billion prior to the onset of Covid-19; analytics/Big Data company Palantir, which had been valued at $11 billion; and Stripe, a credit card processing company serving websites, which had been valued at $22.5 billion. These companies by now have likely learned from Uber and others that they should be showing profit projections and offering better 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 strong 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 1Q IPOs
Data sources: Bloomberg, Triad Securities. Recent Prices as of 3/26/2020
Table 4 is our ranking of underwriters, based on deals done and performance generated.
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