The beginning of 2020 promised so much. While 2019 featured some slow-trotting unicorns, a flurry of IPOs was expected. Sure, Brexit and the American elections were going to make things less predictable, but how bad could it get?
What happened next is well-known. Despite COVID, the market recovered and a glut of capital encouraged the flurry of IPOs to become something of a blizzard. What history has yet to decide is whether this rush to market was broadly positive.
Somewhat disappointingly, our latest look at the numbers suggests that, in many instances, the answer is: ‘not yet’, at least for investors.
Of the 1,374 IPOs on the LSE, Nasdaq (including OMX) and Euronext since the start of 2020, 62% had slipped below the waterline as of 25 March 2022. To be absolutely clear, that’s 852 IPOs.
Also, this average is somewhat flattering to Euronext, which has seen 78% of its IPOs lose value.
London, in contrast, performed better. With more listings than Euronext (154 versus 132), 56% of its IPOs were trading higher. Had you purchased an equally weighted basket of all these stocks, you would now be up 32%.
Nasdaq’s performance was somewhere in between. 63% of its 1,046 IPOs lost value. Your Nasdaq IPO portfolio would be down 10%.
How did all this transpire? With the benefit of hindsight, we can see what drove businesses to list, why the market welcomed them and what has since changed.
Looking back, it’s difficult to overestimate the collective cold sweats induced in boardrooms as the pandemic took hold. Would capital dry up? If so, for how long? What would the unexpected impacts of COVID be? How deep would this go? Was it survivable?
Acutely aware that cold sweats could become hot panics, governments responded rapidly. Fiscal and monetary policies kept major economies lubricated. Investment cash was at least as available as before.
As markets caught on, they rallied. Professional fund managers were buoyed by rising prices and steady capital inflows, while retail investors joined the rush. Demand conditions were set. If 2019 taught investors not to keep all their eggs in one basket, 2020 allowed them to sponsor the basket maker.
These appetites triggered the necessary supply conditions. With continued urgency to secure capital (or simply sell out) while COVID policies held markets buoyant, private businesses raced towards a listing. What could have been a moment of disaster was transformed into a once-in-a-lifetime opportunity for many boardrooms.
Strong demand was met by strong supply. Fearing a collapse in capital markets, collective action had engineered the reverse – an IPO boom. In the decades to come, SPACs are likely to be the totem of this unlikely 18-month-long festival of capital raising.
Through this lens, it is perhaps unsurprising that the majority of pandemic IPOs are now under the waterline. Some lockdown winners are struggling to deliver earning trajectories, rising rates of interest and inflation are putting barriers in the way of growth, while hurriedly constructed shareholder bases tend to unravel.
Some Edison clients have also reported being given less post-IPO support than they would have expected.
Meanwhile, fiscal and monetary policies are now largely withdrawn as governments begin to deal with the mid-term pandemic impact of higher living costs and continuing supply chain failures.
We may also hypothesise that, given the current performance of the recently listed companies, investors could be expected to be wary of the cohort. With other shares being better understood and having a longer public history, unwarranted discounts for the new kids on the block may not be uncommon.
Which is why our IR teams have developed an investor relations playbook precisely for this situation.
The unfortunate truth is that businesses which went public during the pandemic likely need to work harder to achieve strong liquidity, diversify their shareholder bases and equalise long-term valuations.
The good news is that normalising the situation – via an initially intense programme of investor relations stretching across research, wide distribution, marketing and outreach – is entirely achievable.
If you find your company unfairly judged or overlooked by the market, for whatever reason, get in touch today.
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