While much of the business world has been disrupted by the COVID-19 pandemic and sudden recession, IPO activity in the first half of 2020 was down only slightly from the same period last year, inviting the question of just where companies are going public. After IPO issuances came to a near-halt in late Q1 and early Q2, the window opened wide in June, when much-needed liquidity infused the markets and led to the strongest month for IPOs in 13 years. Looking ahead, equity investors are likely to continue as active participants in the IPO market as the economy begins to recover.
The S&P 500 reached record highs in February before the spread of COVID-19 led to a swift plunge of 34% over 23 trading sessions. In response, the Fed took unprecedented action by reducing interest rates to near 0% and committing to directly purchase corporate bonds, mortgage-backed securities and treasuries.
Investors have begun to price in the long-term equity market recovery. The S&P 500 has since rebounded from its mid-March drop of (34%) to a year to date (YTD) return of (4%). Meanwhile, the tech-heavy NASDAQ reached all-time highs in June, closing above 10,000 and returning 12% YTD.
The IPO market in the first half of 2020 was very much a tale of three parts:
Compared to the second half of 2019, the total number of issuances remained relatively flat, but 2020 proceeds were up more than 50% despite periods of high volatility. Compared to the first half of last year, the first half of 2020 saw only a slight reduction in IPO activity, with the 2020 market pricing seven fewer IPOs and raising 8% less in proceeds.
During the first few months of the pandemic, most IPO activity was driven by SPACs and biotech; together they accounted for 83% of all IPOs from March through May, as their valuations are more milestone-based and therefore more resilient to market volatility. Equity markets also saw seven IPOs raise in excess of $1 billion from five different sectors, representing the most megadeal sector diversity since 2011, and an interesting deviation from the typical dominance of technology, media and telecommunications (TMT).
US IPOs were dominated by issuances from the pharma and life sciences (PLS) and SPACs sectors in H1’20. PLS IPO volume was flat compared to H1’19, with biotech comprising more than 80% of all PLS volume, while PLS proceeds were up 148%.
This year has seen record highs for SPAC volume and proceeds, with 37 SPACs raising $10.7 billion. SPACs have accounted for 40% of IPO volume and 33% of IPO proceeds in 2020, nearly doubling the share that SPACs typically comprise. This trend includes an increasing number of serial SPAC issuers and the first-ever SPAC megadeal.
US follow-on activity in 2020 included 406 offerings that raised $125.6 billion, which was the highest proceeds gained in the first half of a year in more than 30 years, at an average discount of approximately 10%. Investors continued to buy into the relatively less affected sectors like PLS and financial services.
The US bond markets saw frenetic activity in the first half of 2020, despite the impact of COVID-19 and related global headwinds. Like the equity markets, bond markets had somewhat of a roller-coaster ride, although the investment-grade bond market seemed to shrug off COVID-19 fears after the Fed announced a primary and secondary market corporate credit facility for up to $750 billion. The high-yield bond market also had a very strong first half, with $202 billion raised over 300 issuances, which is a 40% increase in proceeds raised and a 38% increase in issuances from H1’19. The second quarter in 2020 was the strongest quarter in the past five years. Only one-eighth of high-yield issuances priced at a discount, with the median issuances yielding approximately 6%. The consumer markets sector led the way for high-yield bonds, followed by the industrial products sector.
Investment-grade issuers raced to the markets and reached the $1 trillion mark in only six months – twice the pace of 2019’s investment-grade bond market. The investment-grade bond markets raised more than $1.2 trillion in proceeds over 1,250 issuances, which was up 103% and 69% from H1’19, respectively. Almost three-quarters of issuances priced at a discount in a crowded market, with the median issuances yielding approximately 3.1%. The financial sector raised the most proceeds, followed by the energy, utilities and mining sectors.
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 the above narrative. Debt issuances in the above analysis are US marketplace tranches, denominated in US dollars, and exclude collective instruments. All data is as of June 30, 2020.
IPO Services Co-Leader, PwC US
Capital Markets Advisory Leader, Deals, PwC US
Capital Markets Research Leader, Deals, PwC US