Initial public offerings are back
After a coronavirus-related pause, a resilient initial public offering (IPO) market has made a robust comeback. As of the end of the second quarter, the U.S. IPO market has launched 64 IPOs—a third of them occurring in June, with the average IPO returning 61%. Getting the third quarter off to a strong start were 22 IPOs and 42 secondary offerings (secondary offers include any public sale of stocks or other securities that occur after a company’s IPO. They can include sales from both the company and from major shareholders) as of the third week in July. Not surprisingly, given a Covid-focused economy, the Health Care and Technology sectors and biotech subsector have dominated –representing nearly two thirds of the IPOs issued so far. All told, the second quarter of 2020 was the most active quarter for equity offers in 10 years.
What does this mean for growth investors? Acknowledging the challenges and uncertainties ahead, we believe there are good reasons to be optimistic:
The capital markets are open—According to Renaissance Capital, over $100 billion dollars were raised through more than 300 equity offers in the first half of 2020. Companies used these funds to recapitalize their balance sheets to protect against market weakness but, importantly, to fund future growth as well. Our current view is that the worst is over, the recovery is underway and numerous, growth-oriented firms will transfer their built-up liquidity into investments for research and development and expansion.
The IPO pipeline continues to build for the second half of 2020 and beyond—At the current run rate, the market is on track to price around 120-130 IPOs by year end. That is below the 150 offerings per year average over the last 12 years, but considering the extraordinary virus impacts, far from a disaster year.
An active IPO market supports growth investing—IPOs are vital to the volume and diversity of companies to which investors can allocate their capital. Most often, they are young companies with the potential to generate greater returns than any other kind of stock. For growth investors with access to this market and the ability to scrutinize offerings for long-term potential, IPOs are a way to opportunistically utilize the capital markets to initiate or add to positions at advantageous prices. As long-time growth investors, Federated Hermes Kaufmann portfolio managers and analysts are experienced in the IPO market, often exploring companies and getting to know their management teams for years before they go public. So far this year, the Kaufmann team has evaluated numerous IPOs and secondary offerings, ultimately participating in 32 IPOs and 49 secondary offerings.
We believe momentum remains strong for growing companies to raise funds and with less private capital available, this should be a prime year for growth managers to take advantage of the IPO market to benefit performance and investors.