The initial public offering market turned in incredible results in 2020. The Federal Reserve’s efforts to support the economy by moving interest rates to near zero, likely keeping rates very low for a long time, and initiating a massive bond–buying program, stabilized markets and kept them working. An unintended consequence, however, was a mad rush into the IPO market, propelling it to record results. The year saw over $170 billion in total capital raised, exceeding the prior top year of 2007 by more than $63 billion.
The current frenzy in equities has the qualities of a market bubble, led by IPOs like Airbnb and DoorDash and spurred in part by investor fears of missing out on big gains. Economic conditions were not remotely normal last year, with pandemic shutdowns, work–from–home rates of up to 35%, millions unemployed, and innumerable business failures. The interest rates the Fed dropped to super–low levels to encourage business activity also constricted the number of investment opportunities that offer returns outpacing inflation. That has left holders of cash and many investments feeling penalized. Equities, with their potential for unlimited upside and deep liquidity, have benefited spectacularly during these peculiar times.
Volatility in the market made SPAC IPOs particularly attractive in 2020, as SPAC IPOs offer more flexibility, speed, and valuation certainty compared to traditional IPOs. Although traditional IPOs enjoyed a very strong year, with deal counts more than tripling and capital raised increasing nearly sevenfold since 2019, SPAC increases were even more astounding. SPAC IPO deal count jumped 658% and the value of SPAC IPOs rose an eye–rubbing 1,028%.
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