It is commonly understood that the more people have access to the financial markets, the better the economy will be. This is an adage that reigns true on many different levels, particularly when a company gains access to public markets through an initial public offering (IPO). 2020 was the second-best year for market listings after 2007 as businesses raised almost $300bn through flotations globally, including a record $159bn in the U.S.
After the Covid-19 pandemic hit U.S markets in March 2020, equity valuations rebounded, luring in blank-check acquisition vehicles and making way for IPOs.
An IPO is a method that companies can use to go public - which will make their stock available to retail traders and investors. Before a new stock issue reaches the market, investment banks, which generally underwrite the IPO, will recommend an initial price for the shares based on the predicted demand for them.
Going public has considerable benefits. The funds allow companies to invest in new capital equipment and infrastructure. Some companies are also looking to raise capital to pay debts, attract and retain talent as well as to monetise assets. The IPO allows companies to attract top talent because it can offer stock options.
What an IPO entails
Completing an IPO will often involve drastic changes to business, capital and management structures. Once public, a company will be subject to various additional rules and reporting regulations.
Going public means that liquidity for investors is enhanced since securities can be traded through a public market. While a value for securities is established, publicly traded securities remain attractive for other purposes, such as executive and employee compensation.
Above all else, the primary advantage of the IPO is that it increases access to capital-raising opportunities, both public and private financings. This naturally leads to an expansion of a company’s investor base.
Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth (modernisation and upgrade production facilities, implementation of capital-intensive projects) and acquisitive expansion. For this reason, the IPO remains one of the most effective ways to maintain growth within a business.
The IPO boom
Stock listings flourished in the aftermath of the coronavirus pandemic, giving way to an IPO boom. This was largely caused by a shift in consumer behaviour which has attracted more investors to IPOs. The demand is particularly strong for flotations of technology, healthcare and consumer groups.
Given that the IPO provides access to a timeless pool of capital and boosts the investment credibility of a business, the number of retail IPOs continues to increase year over year. As of February 2021, U.S markets had recorded 189 IPOs a notable rise from the 26 IPOs recorded in the same period in 2020.
In December 2020, Tesla announced that it would sell $5bn new shares while DoorDash, a food-delivery company, raised $3.4bn in an IPO. The clothing reseller Poshmark announced its plans to go public in September 2020 and by early 2021, the company had raised $277 million in the offering. Further, in December 2020, Barkbox, an online pet subscription service, announced its intent to enter the public markets via a $1.6bn SPAC merger.
In Hong Kong, shares of JD Health, an online pharmaceutical and healthcare product retailer rose by 50 percent on their first day of trading after its $3.5bn IPO. Globally, some $800bn of equity was raised in 2020 by non-financial firms, setting a record for the highest sum in history.
The appetite for active participation in IPOs is clearly growing amongst retail investors. To partake in an IPO, an investor must register with a brokerage firm. There are some companies like Freedom Holding Corp. (FRHC) that offers IPO participation for retail investors through its platform - Freedom24. However, the threshold for applications begins at $2,000. Other companies like Fidelity also offer participation, but with a higher threshold of either $100,000 or $500,000 in household assets - depending on the IPO itself.
What to expect in 2021
IPOs in the UK and Europe had a strong start in 2021, fueled by companies that have expanded during lockdown, including online digital firms and gamer stocks.
European and UK stock exchanges have raised $10.2bn through 16 initial public offerings so far this year, marking the best such start in the IPO market since 2015.
The listing of a flurry of tech and digital firms raises hopes that Europe can better compete with the U.S. For example, German venture capital firm Lakestar is reportedly seeking up to $484 million in a SPAC listing in Frankfurt this year.
U.S equities have also rallied back to record heights, generating a record $22.6bn in deals so far. Investors have been snapping up shares of technology groups that have grown as consumers and businesses embrace a new work from the home era. This has provided fertile ground for emerging companies such as Snowflake the cloud computing provider, and Unity Software, which makes technology for video game developers.
The UK takeaway delivery service Deliveroo, which has a value of more than $7bn, is planning to list in Q1 of this year.
It is worthwhile to note that more than two-thirds of the new listings are companies that flourished amid pandemic lockdowns - online, e-commerce and gamer stocks.
Overall we have witnessed some tectonic shifts in the global IPO landscape, with market experts predicting that strong performance will continue through 2021 as low interest rates and investor enthusiasm remain.
Dmytro Spilka, writer