Q2 2021 Capital Markets Watch
US on track for highest GDP growth in nearly 40 years
Fueled by record-setting venture capital valuations, traditional IPOs made up the majority of IPOs in Q2 2021, overshadowing special purpose acquisition companies (SPACs) for the first time since Q2 2020. We expect this trend of late-stage companies emerging as prime IPO candidates to continue in the near future.
US real GDP growth remains on track to rebound in 2021 to its fastest pace since the early 1980s. Strong fiscal support, along with elevated household savings, should continue to boost consumer spending over the coming months. However, with COVID-19 cases falling and business restrictions easing, consumer demand should rotate from goods to services later this year. We expect economic activity to peak in the current and next quarter and moderate thereafter.
Our baseline expectation is for economic growth to rise above 7% in 2021, with some strength carrying over into early next year. Inflation is at its highest levels in 13 years, per the US Bureau of Labor Statistics, affecting consumer prices and investor decision-making. In response, the Fed raised its inflation projections but remains patient on increasing interest rates. A key question is how long this inflationary period will last. For more economic insights from PwC, please see our FY 2021 Economic Forecast.
“In a bullish market supported by strong earnings and expectations for continued growth, the IPO window is wide open. To take advantage of this positive investment sentiment, there is no time like the present to get started on assessing your own readiness.”
Economic and earnings growth forecasts fuel IPOs
IPOs
- Q2 2021 saw 99 traditional IPOs, which raised $40 billion, the highest volume of traditional IPOs in 20 years.
- Excluding SPACs, technology IPOs dominated in Q2, with 41 IPOs raising $23 billion, including the largest raising more than $4 billion. Pharma life sciences (PLS) IPOs followed closely, with 36 IPOs raising $6 billion.
- Traditional IPOs continue to enjoy strong equity markets, with S&P and Nasdaq up 8% and 9%, respectively, for the second quarter of the year.
- The short-term outlook for traditional IPOs remains strong, as IPO investors finished up 36% in the second quarter (including one foreign filer that surged over 400% in trading debut), again solidly outperforming broader equity indices.
- Positive outlooks for consumer spending, an expected S&P annual earnings growth of 11% and historically high levels of relatively cheap liquidity chasing good deals all support the expectation for a strong IPO pipeline.
SPACs
- The second quarter saw 62 SPACs, which raised $12 billion. This was a spectacular 80% drop from the first quarter but more in line with historical issuances seen pre-SPAC attack. The second quarter saw 32 completed SPAC mergers, led by the information technology sector.
- Completed SPAC mergers in Q2 have shown a healthy return of 27%. Although completed SPAC mergers are trading up, we think SPAC IPOs will continue to slow down due to the finite number of public-ready companies. Increased scrutiny from the federal government and transparency of SPAC deal economics are causing investors (including PIPE investors) to hesitate.
- Abundant dry powder is available for SPAC deals. There are 431 SPACs with $117 billion on hand that generally have two years to complete an acquisition. Combined with PIPE financing, this represents about $300 billion of buying power.
Venture capital
- Venture capital (VC) invested $48 billion in 671 deals in Q2 with 28 of those companies currently in IPO registration and expecting to go public. This makes 2021 a record VC year as more capital has been invested in the first half than any full year prior. There are 451 late-stage companies with a valuation of $500 million or greater — prime candidates to supply the IPO or M&A pipelines.
- Most deal activity centered around the technology and biotechnology sectors, with artificial intelligence, fintech and big data being common characteristics for tech investments while biotech continues to see healthy investments in oncology and life sciences.
- The second quarter had 53 VC exits, with 12 sales and 41 IPOs as going public continues to be the most popular way for VCs to exit their investments.
- Looking forward, there continues to be growing VC interest in decentralized finance as well as in health and wellness tech. With about $150 billion available in dry powder, we expect the VC market to remain active, assuming public equity markets continue to be stable.
Debt markets continue to shrug off inflationary concerns
US debt markets raised $678 billion in Q2 2021. While investors continue to look for hints from the Fed about future rate increases, the market generally has shrugged off inflation concerns. Spreads among many indices are near or at their tightest levels as investors continue to search for incremental yield and drive down risk premiums. We expect the market to continue its run, specifically in the high-yield and leveraged loan space, supported by a strong pipeline of M&A and leveraged buyout (LBO) transactions.
- The investment-grade bond market raised $352 billion, which is a $70 billion reduction from Q1, driven primarily by a large reduction in technology, media and telecommunications (TMT) financings.
- The high-yield bond market issued $137 billion, with the TMT sector driving 27% of issuance; 22% of proceeds supported M&A and LBO activity, up from 9% in Q1 2021.
- Borrowers raised $189 billion in the leveraged loan market, with the TMT and consumer markets sectors representing 24% and 22% of total issuance, respectively.
Buyout activity roars back after a pandemic pause
- LBO activity continues its strong rebound from COVID-19 with $55 billion of issuance in Q2, bringing YTD issuance past 2020s volume.
- LBO-related debt issuance in Q2 has primarily funded consumer markets and TMT deals with 68% of proceeds. Notably, consumer markets LBOs raised $20 billion, an increase of $9 billion from Q1 2021.
- The average purchase price multiple for an LBO increased to 11.7x in 2021 as competition among buyers for targets continues to swell.
- Leverage among large corporate LBOs has increased from 5.9x in 2020 to 6.3x this year as demand for risk assets and the competitive nature of providing capital has swung the pendulum in favor of the borrower.
Please note: IPOs with deal values that are less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Data from SEC filings and third-party databases as of June 30, 2021. LBO issuance includes deals in the US high yield bond and leveraged loan markets. Purchase price multiple and leverage as of May 31, 2021.
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