IPO market cools as sentiment shifts from ‘extremely bullish to bullish’

Enthusiasm for IPOs appears to be cooling after a recent strong stretch in which companies posted huge profits despite the bleak background of a global pandemic. be a little more pragmatic when it comes to offers, said Jay Ritter, a finance professor at the University of Florida, but only up to a point. Even the most moderate price movement in March is high by historical standards.

The end of March brought a string of less-than-stellar debuts, especially given the backdrop of the burgeoning IPO market over the past year. Real estate brokerage Compass Inc. COMP, + 1.76% cut its offering, which then traded at the lower end of the company’s already narrow range. Frontier Group Holdings Inc. ULCC airline shares, -0.79%, ended their first day of trading below their IPO price, which was also at the lower end of the company’s expected range. The average first-day stock gain for March IPOs was 21.3% among operating companies, Ritter said, down from nearly all of the previous 12 months, but still above historical levels. Mid-March IPOs traded above their mid-points, a lower percentage than what was seen for much of the past 12 months, based on Ritter’s analysis of IPOs with original stock price mid-points of at least $ 8 per share. Robert Reffkin, CEO of Compass: COVID created a ‘permanent shift’ in real estate demand. “Individual companies are being considered based on the fundamentals of those companies rather than just ‘it‘s an initial public offering,'” Ritter said.

media-object type-InsetPullQuote inline scope-web|mobileapps article__inset article__inset–type-InsetPullQuote article__inset–inline “>

“It’s not like investors are saying, ‘We are pessimistic about these companies. It’s more of a throwback from extremely optimistic to optimistic. “” – Jay Ritter, professor of finance, University of Florida

Still, the valuation ratios remain high. Over the past 20 years, the price-to-sales (P / S) ratio for publicly traded technology companies was typically around 6, according to Ritter. In 2018 and 2019, the median P / S ratio rose above 10, before rising to 23.3 in 2020. So far this year, the median is 17.8. “It’s not like investors are saying ‘we’re pessimistic about these companies,'” Ritter said. “It’s more of a throwback from overly optimistic to optimistic.” While the IPO market is likely to remain active, recent dynamics suggest that companies may have to readjust their expectations, said Chester Spatt, a finance professor at Carnegie Mellon University’s Tepper School of Business. “Expectations for much of last year, past the initial part of the pandemic, continued to rise,” he told MarketWatch. Now, “companies may need to have more of a track record to have an effective initial public offering or to get a very desirable valuation.” Spatt still expects to see continued trading activity, “perhaps with more modest valuations, partly based on the performance of other technology companies and the level of interest rates.” He argued that “fundamentally, there are a lot of savings that are on the sidelines”, which “will have the effect of maintaining interest in the IPOs.” Entertainment company Endeavor Group Holdings EDR, + 4.98% recently recovered its IPO plans after filing them in late 2019, but Intermedia Cloud Communications Inc. said in late March that it was postponing its own plans, citing “the current challenging conditions in the market for initial public offerings, especially for technology companies. ” Crypto platform Coinbase plans to go public on a direct listing on April 14. This represents “a classic situation where a company goes directly public to potentially avoid leaving a lot of money on the table with an initial public offering at low prices,” Ritter said. Direct listings are an option for businesses that don’t need to raise money through bidding. While brand-name tech companies tend to generate a lot of IPO buzz, Ritter notes that 40% of IPOs in the past eight years have come from biotech or biopharmaceutical names, and there should continue to be a steady stream of those deals. . What helped fuel the roaring 2020 IPO market was the rise of Special Purpose Acquisition Companies, or SPACs, which raised billions of dollars while looking for companies to acquire. There are now 433 SPACs that went public and are looking for targets, Ritter said, and with all of them, new SPAC offerings are disappearing. SPACs, or blank check companies, raise money in an IPO and then have two years to acquire a business or businesses. An average of 24 SPACs were made public each week this year, according to Ritter, until the last 7-day period, when only 2 SPACs were made public. SEC officials have issued a series of warnings about SPAC and SPAC mergers, with the latest one urging “careful consideration of whether the target company has a clear and comprehensive plan to be ready to go public.” A slowdown in SPACs “may be a good thing because we have so many SPACs in the market,” said James Angel, a finance professor at Georgetown University’s McDonough School of Business. “The fear is that SPACs will become a crowded store with so many SPACs chasing very few opportunities,” all with roughly the same deadline to find a deal. Ritter added that with so many SPACs in the market, it can be difficult for them to negotiate trading prices that are attractive to their investors. “Bargaining power has been transferred to operating companies,” he said. Renaissance IPO ETF’s initial public offering, + 2.06% is down 1.6% year-to-date, below the S&P 500 SPX, + 1.18%, which is up 7%.