The stealth hot IPO market of 2020

Many of us have used Airbnb to find a place to stay while traveling, and the pandemic has made the service even more popular in some areas because people feel safer staying in a private residence than in a hotel. Now if things go according to schedule, these users of Airbnb will be able to become partial owners as well, starting roughly around noon on Thursday, 10 December. That’s when Airbnb’s shares should begin trading on the Nasdaq after pricing its IPO the night before. Interest in the offering is high, as the indicative offer price range was increased Monday morning, and a strong debut would be a fitting cap to what has been a fantastic year for IPOs. Given all that’s happened in 2020, it’s a development that has understandably fallen below the radar for most investors.

Yet it’s remarkable that it has not only occurred during a pandemic, but that it’s the hottest IPO market since 2000. This is true whether measured by the amount of capital raised in the IPOs—nearing USD 60bn for the year—or by the average return on their first day trading on a listed exchange—44% for our sample of companies. To put that in perspective, the average for all IPOs since 1980 is 18%, and the only time it was higher was in 1999 and 2000, when they reached the sky-high levels of 94% and 73%, respectively.

It’s important to note that this doesn’t include IPOs from any SPACs (special-purpose acquisition companies), which are worthy of their own deep dive analysis. SPACs have raised about USD 70bn this year, more than four times their prior yearly high set just last year.

The first obvious question is why has this hot IPO market materialized, in this year of all years. Sometimes magic just happens, but in this case there are identifiable factors that have contributed to this development. The first is that while equities overall have had a good year—the S&P 500 is up 14% so far—growth stocks (34%) and especially recent IPO companies (100% for the Renaissance IPO ETF) have done fantastically well. These types of returns attract investors, who already have a seemingly insatiable demand for stocks with attractive secular growth stories. This also creates an incentive for companies with those attributes to go public, which is reflected by the 60% of the total number of IPOs being done by companies in the biotech, pharma, and software industries. Add it all up and you have the conditions to foster a hot market.

The next question is how long this can continue. No hot IPO market lasts indefinitely, but this one should continue well into 2021. We expect equities to grind higher next year on the strength of improving economic conditions, a receding pandemic, and very supportive policy, a favorable environment for IPOs. Investor demand for growth stocks is also unlikely to abate, while there is still a healthy supply of potential IPO candidates. For instance, there are over 240 “unicorns”—venture capital-backed private companies with estimated valuations of at least USD 1bn—in the US, and it’s reasonable to expect that some will decide to go public next year.

Harkening back to the dotcom era of 2000 may raise an eyebrow as not the most flattering comparison, given how that subsequently turned out. But this time is different in significant ways. The economy today is just starting an expansion; it’s not in year 10. The 10-year Treasury yield is less than 1%, not 6%. And Fed monetary policy is incredibly loose as opposed to being tightened into restrictive territory. Also, the fact that the hot IPOs this year has gone largely unnoticed speaks to it being more of a slow-burning market versus the white hot one in 2000 that soon flamed out. There's no question that 2020 was a tumultuous year, but underneath the surface the IPO market has been a clear bright spot.

UBS House View Weekly: Regional View US authors — Jason Draho, Head of Asset Allocation Americas, and Vincent Amaru, Investment Strategist Americas

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