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Q1 2021 Capital Markets Watch

What’s next in the capital markets evolution?

What we're looking at for capital markets

As the US begins to contemplate a post-COVID-19 recovery and business and consumer confidence rises, investors are showing continued willingness to deploy large amounts of capital into both equities and the debt markets. The capital markets pipeline remains populated with high-quality issuers, which, combined with investor demand, should point to continued strength in capital raising.

US real GDP growth is set to rebound in 2021 to its fastest pace since the early 1980s. The $1.9 trillion federal economic stimulus package, along with the easing of service sector restrictions, should provide a meaningful boost to growth over the spring and summer months, with activity accelerating in the current quarter, peaking in Q2 and Q3 and moderating thereafter. While some uncertainty remains, our baseline expectation is for economic growth to top 5.5% in 2021, with some strength carrying over into early next year.

“With the capital markets at record levels of activity and valuations, our clients have tremendous opportunities and more choices than ever. But timing, execution and getting the right advice are critical.”

Doug Chu, West Coast Capital Markets Advisory Leader, PwC US

IPOs and SPACs go to the moon

The US equity and IPO capital markets in Q1 kicked off with yet another record driven by the continued SPAC attack, with 389 IPOs raising $125 billion. Traditional IPOs remained relatively flat from prior quarters, so it was the market’s fascination with and enthusiasm for a broad range of SPACs (special purpose acquisition companies) targeting multiple industries that caused the increase. Media attention on some high-profile SPAC mergers generated a lot of interest. We expect a strong supply of IPO candidates to contribute to the pipeline, coupled with continued investor appetite, to support IPO markets in 2021. Still, there are questions if the current pace can continue.

Debt markets hint at increasing M&A

US debt markets raised $789 billion in Q1. Most of the proceeds went to refinancings, but there was a notable increase in the M&A share. The Fed has indicated no rate increase this year and has had a very patient posture on raising rates. But the market’s recent upward swing in the 10-year Treasury yield suggests that other factors, such as inflation and GDP growth, will be front of mind. We expect the leveraged loan market, primarily LBO issuances, to pick up steam as private equity firms deploy their dry powder.

The SPAC attack continues

  • Traditional IPOs raised $38 billion from 91 issuances, remaining relatively flat over the past three quarters.
  • It’s only three months into the new year, and the number of SPAC IPOs has already surpassed that of 2020 with 298 SPAC IPOs raising $87 billion. That’s also triple the number of SPAC IPOs in Q3 2020, when they first started to rise in popularity. So far this year, 24 SPAC mergers have been completed.
  • Combining traditional IPOs and SPACs produced a record amount of volume and proceeds raised during a single quarter.
  • Sectors: Excluding SPACs, pharma and life sciences (PLS) IPOs dominated in Q1, with 34 IPOs raising $7 billion. Tech IPOs followed closely, with 28 IPOs raising $21 billion, including the largest raising over $4 billion.
  • Returns: SPACs that completed mergers in Q1 have shown a healthy return of 27%, which outperformed most IPO sector returns. Traditional IPOs returned 15%, solidifying SPAC and IPO returns as outperforming the S&P of 6%.

Economic growth supports a strong quarter in the debt markets

  • The US debt markets saw another strong quarter as positive news surrounding the COVID-19 vaccine rollout and fiscal stimulus measures helped support access to capital for borrowers.
  • The investment grade markets raised $422 billion with a healthy balance of supply and demand for investment grade bonds, particularly those used in refinancing transactions.
  • The high-yield bond market issued $152 billion, an increase of $80 billion from Q1 2020 due to the near shutdown of the market in March 2020.
  • The leveraged loan market issued $215 billion, a notable pickup compared to $129 billion in Q1 2020, with LBO transactions increasing 64% from the comparative period.
  • Yields have seen a slight uptick in the first quarter following an 83 bps rise in the 10-year Treasury since the beginning of the year as market participants continue to weigh the effects of inflation and economic growth.
  • Spreads from the 10-year Treasury have tightened over the past year as a combination of central bank support, fiscal stimulus and economic growth expectations has supported the rebound in creditworthiness of corporates as compared to the federal government.

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 3/31/21.

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Mike Bellin

Mike Bellin

IPO Services Co-Leader, PwC US

David Ethridge

David Ethridge

IPO Services Co-Leader, PwC US

Daniel Klausner

Daniel Klausner

Capital Markets Advisory Leader, PwC US

Doug Chu

Doug Chu

West Coast Capital Markets Advisory Leader, PwC US

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