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ANALYSIS: IPO Market Hauling Larger Deals During Pandemic

July 10, 2020, 9:04 AM

In the first half of 2020, the market for initial public offerings weathered the pandemic with larger deals, particularly from special purpose acquisition companies, commonly known as SPACs. Compared to the pre-Covid-19 fourth quarter of 2019, Q2 2020’s deal count grew from 62 to 73 deals, while the average deal size ballooned from $172.8 million to $354.2 million, a 105% increase in just two quarters. The average deal size for the 24 SPAC IPOs completed in Q2 2020 was $330 million, rising 67% from an average of $197.6 million on 17 deals in Q4 2019.

One offering of interest is a pending IPO by Pershing Square Tontine Holdings. That SPAC is backed by Bill Ackman’s hedge fund and seeks to raise $3 billion in the offering and $6.45 billion overall. If successful, it would be the largest-ever SPAC public stock offering.

A SPAC is an investment vehicle that takes the form of a shell corporation. It searches for a target company with which to conduct a reverse merger.

Why Larger Deals?

The short answer to this question is that there is more investment cash available in the U.S. economy. The Federal Reserve’s recent stimulus actions are providing a floor for asset values. Much as the Fed’s quantitative easing during the 2008 financial crisis gave birth to an era of cheap money and a bull market in equities with unprecedented endurance, its current stimulus programs arguably encourage increased risk taking because the Fed has significantly diminished the downside risk to investors. This stimulus may be a factor in the increasing size of recent deals.

1H 2020 Sees Significant Increase in IPOs Over $500 Million

The number of IPOs on U.S. exchanges has only modestly increased since the dot-com bubble burst in 2000. The market has grown because the size of deals has grown, not their count. In the 1990s, smaller deals were the norm, but ever-larger deals has been the trend in recent years.

The current pandemic market appears to be accelerating the increase in offering size. In 2015, 53.6% of IPO deals fell into the $1M–$100M range. That figure has been dropping nearly every year, falling to only 34.4% of IPOs during the first half of 2020. The $100M–$500M offering size is now the most common, reaching 51.2% of all IPOs in 2019. However, even that range’s share has begun to erode in 2020, falling to 47.1%.

Gaining share in the market are the larger offering sizes. The $500M–$1B offering size rose from only 4.5% of offerings in 2014 to 10.1% this year. The next IPO size of $1B–$10B has increased even more impressively. Representing only 2% of offerings in 2015, this pricing bucket’s share has more than quadrupled to 8.4% so far in 2020. All told, public offerings raising at least $500 million represented 18.5% of the U.S. IPO market in the first half of 2020, a 231% increase from 2015.

Larger Offerings Raise Similar Amounts on Far Fewer Deals

Large IPOs have reached near-parity with smaller offerings in terms of amounts raised. Offerings raising between $1B and $10B raised a total of $8.81B from only five deals in the second quarter. The next smaller range, $500M–$1B, raised $6.91B on 10 IPOs. It took 36 deals for offerings raising between $100M–$500M to raise $9.17B, only modestly more than the largest pricing group. The smallest offering size of under $100M raised less than $1B on 22 IPOs in the quarter.

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