IPO and Spac surge expected to slow, study says
Investors continue to feel enthusiastic about the IPO and special purpose acquisition company (Spac) markets, though many expect the number of new entrants to the public markets to tail off by the end of the year, according to a new survey from Edelman.
During 2020, despite the volatility caused by the Covid-19 pandemic, the global IPO market and Spac IPOs both hit historic highs.
Almost nine in 10 investors surveyed by Edelman expect to invest in at least one IPO and Spac listing this year. But the same number of investors anticipate that the pipeline of companies coming to the public markets will dry up: 90 percent of investors expect the IPO market to slow down by the end of the year, while 92 percent think there will be fewer Spac listings by December.
The report highlights a strong appetite from investors for investment in new entrants to the public markets across several sectors. Almost two thirds (62 percent) of respondents are more driven to invest in the financial sector and 45 percent are interested in investing in the technology sector. Only 9 percent are looking at investing in consumer discretionary and 8 percent in real estate.
‘While many have questioned the longevity of this surge, our data shows that investors remain engaged and have a strong appetite for new issues – particularly those in the financial and technology sectors,’ Ted McHugh, Edelman’s head of investor relations, says in a statement.
Spacs have delivered mixed results during the boom of the last 18 months, but the majority of respondents (88 percent) say the quality of companies accessing the public markets via Spacs has improved. In addition, 86 percent say their company has increased its investment in Spacs in the last one to two years.
Despite the improving profiles of the Spacs that come to market, 85 percent of respondents agree the investment vehicles should face additional regulation from the SEC.
BALANCING FINANCIAL AND ESG EXPECTATIONS
The report highlights that survey respondents believe revenue growth is driving valuation. The authors of the report note that ‘90 percent of investors surveyed say they prioritize a company’s non-Gaap adjustments for Ebitda and net income when determining valuation.’
When responding to the question on the impact of corporate governance practices and their willingness to invest in a company going public, 81 percent of respondents believe the credibility/quality of the board plays a huge role. ESG, the topic in the spotlight at this year’s proxy meetings, also plays a vital role, with 90 percent of respondents expecting a clear and defined ESG strategy within a company’s first year being public.
For many new entrants to the public markets, short-term pressures can feel acute, raising questions about whether to publish earnings guidance. More than half (52 percent) of respondents recommend that new public companies issue annual guidance.
The authors of the report also point out that ‘89 percent of investors say they would rather a company take a more conservative approach to how much near-term guidance it provides for its first few quarters.’
‘As companies look to go public, they must continue to emphasize their long-term growth prospects, brand positioning and the credibility of their board,’ McHugh notes.