The coming fall is set to break initial public offering (IPO) records. 2021 is already the biggest year in terms of deal size and number of deals, since the dot com bubble of 2000. The data suggests that we will have between 90 and 110 IPOs this fall, putting the market on track for 375 IPOs this year, with approximately $125 billion raised. Data collected by Renaissance Capital shows that IPOs have raised $96.4 billion so far. This IPO bonanza is the subject of a piece in CNBC, a piece which highlights the number of household brands that are set to debut on public markets.
Fresh Market, a fresh food grocer; Authentic Brands, a brand licensor; and Allbirds, a sustainable footwear manufacturer, have all filed for a fall IPO.
A number of household brands are rumoured to be considering a traditional IPO. The most interesting and believable rumours centre around Chobani, a Greek yogurt maker beloved by health-conscious millennials; Sweetgrean, a fast casual salad restaurant chain; Impossible Foods, a plant-based meat products maker; and Flipkart, India’s largest ecommerce business.
Tech firms have dominated markets over the last two decades and they will not be left behind in the fall IPO bonanza. Payments processors Stripe and Toast are set for an IPO this fall.
Another mega trend represented in the IPO world is that of cryptocurrency. The most interesting cryptocurrency IPO is that of Stronghold Digital Mining.
Airliner, Republic Airways, heads to public markets at a time in which airlines are still struggling to recover from last year’s unprecedented global lockdowns.
TPG, a global asset manager, is also headed toward a fall IPO.
As the world chases a green future, electric vehicles (EV) will form an important element of the transition to green technology. EV maker Rivian Automotive has pencilled itself in for an IPO.
2022 Direct Listings
The prescription eyeglass firm, Warby Parker (NYSE: WRBY) is set to enter public markets by way of a direct listing. The digital optimization company, Amplitude (NASDAQ: AMPL) has also filed for a direct listing. The grocery delivery firm, Instacart is rumoured to be weighing whether to list directly or by way of a traditional IPO.
Direct listings have become increasingly popular, due to concerns that traditional IPOs leave money on the table for listing firms. Data suggests that IPO firms are regularly undervalued. Between July 1, 2009 and June 30, 2019, IPO firms had average first-day returns of 16%. Venture capital backed IPOs had average first-day returns of 21%. Given the amount of work that goes into pricing a firm heading for an IPO, it’s surprising to many people that these firms are still so underpriced. The answer, for many founders and investors, is that the underwriters of IPOs have incentives to underprice IPOs, given the compensation structure, meaning that IPOs are leaving money on the table for firms.
Special purpose acquisition companies, or SPACs, are, like direct listings, a reaction by many entrepreneurs, and investors, to the defects of a traditional IPO. They have earned the praise of venture capitalists such as Bill Gurley, and the ire of investors such as Charlie Munger, who has said “the world would be better off without them” and a “sign of an irritating bubble”. Wherever you stand on SPACs, they have had a big year.
So far this year, like a good dentists, 415 SAPCs have raised $109 billion as they debuted on public markets. This fall, markets are expecting 310 SPACs are expected to hit the markets and raise $70 billion.
Take off those cool browline glasses you’re wearing and let’s go through why the flood of investment is not always such a great idea. The trouble is that SPACs have been affected by asset growth effects: rates of return have declined as capital has flowed into the SPAC market, causing investing to cool off on them. In addition, regulators have expressed some unease about SPACs, as witnessed in Bill Ackman’s failed bid to launch a SPAC.
Asset growth effects work this: high rates of return, especially when combined with large and growing markets, attract new entrants. That flood of investment had the effect of bidding up prices of assets in that market, driving returns down. In particularly ferocious markets, returns can be driven down to the cost of capital and below. This dialectic means that the market’s very attractiveness works against it. Only when there are barriers to entry or a market participant can build substantial competitive advantages, is it possible to thrive in that market.
Asset growth effects not only explain why SPAC returns have declined, they suggest that returns will fall even further. This does not imply that there are no good SPACs out there. The class may be in decline, at least until capital starts to exit and the market consolidates, but there are or should be individual SPACs that do well.