By most metrics, 2021 has been a bumper year for public listings. More companies than ever have made their public market debuts this year, blowing away past records for initial public offering listings, both in terms of deal volume and proceeds.
With global economic conditions showing signs of growing strength, some investors may look forward to another record year for IPOs in 2022. However, a look beneath the surface reveals a more complicated state of affairs, one that could end up complicating the IPO calculus of companies and investors alike in the year ahead.
Setting records in 2021
Based on the headline numbers alone, the IPO boom appears to be going strong. In 2021, global IPO volumes surged a whopping 64%, with 2,388 new public company listings worldwide, raking in an impressive $453.3 billion in total proceeds — a 67% rise from 2020.
The U.S. market once again claimed the lion’s share of the year’s IPO deal volume, with more than 900 companies debuting on its stock exchanges in 2021. The spike in IPO activity in the U.S. in particular has been due in no small part to the boom in special purpose acquisition company listings, as Business Insider noted on Dec 16:
“Helping drive a resurgence in new company listings were SPACs, which peaked in early 2021 after a surge last year. Altogether, companies have raised $453 billion in proceeds from their IPOs, representing a 67% increase relative to 2020 and a more than doubling from 2019 levels.”
As I discussed recently, SPACs have emerged since 2019 as a popular alternative to the conventional IPO path, since SPAC deals offer a comparatively faster and less onerous path to accessing public capital markets. In fact, SPAC volumes have dwarfed other forms of public listing this year: Of the 942 companies that listed on U.S. exchanges in 2021, 599 did so via SPAC while just 383 took the traditional IPO route to the public market.
Venture capital cashing out
Many of the biggest public listings in 2021 have been for venture capital-backed companies. Many big venture capital firms have taken the opportunity to sell off their positions in companies with bulging valuations. Tiger Global, for example, has raked in a staggering $11.3 billion after cashing out of no less than six of the year’s 20 biggest venture-backed IPOs, including those of Coinbase Global Inc. (COIN, Financial) and Roblox Corp. (RBLX, Financial).
The bumper returns enjoyed by venture capital funds in recent years have attracted a flood of capital from investors of all stripes. This has, in turn, led to record-breaking valuations for venture-backed companies. While these valuations have undoubtedly done much to attract investors into venture capital, they have also created potential problems for future exits. In fact, some industry experts have concluded that the raft of IPOs in 2021 may have been driven by a rush to the exits, rather than fresh enthusiasm, according to a Dec. 1 industry report by PitchBook:
“The VC market has matured and attracted increasing amounts of capital from nontraditional investors, which has enabled companies to reach elevated valuations without facing the scrutiny of public markets. That logjam of companies big enough to go public and feasibly survive has finally started to batter its way through the floodgates and provide some liquidity for private backers and employees. It is still a little unclear if the public listing activity in 2020 and 2021 was just a rush to the exits while the window remained open and market valuations were high—or if this rapid activity will continue for the foreseeable future. The threats of rising interest rates and macroeconomic shifts remain ongoing risks for the public markets, which are key to the strength of the IPO market.”
Performance anxiety
The lackluster post-IPO performance of a number of high-profile companies have added fresh anxieties about the overall health of the IPO market heading into 2022. DiDi Global Inc. (DIDI, Financial), for example, has plummeted by more than 60% since its IPO, while Robinhood Markets Inc. (HOOD, Financial) has lost half its value since its debut in July. The list goes on.
While the venture capital funds that backed these companies have reaped rich rewards from selling into IPOs, the investors who bought into those deals have increasingly lost out. This has begun to weigh on future IPO prospects, as PitchBook observed on Dec. 10:
“The largest IPOs also demonstrated how short-lived those paper profits can be…Lackluster performance has led to a cooling off in the IPO market that has caused some new issuers to delay or downsize their IPO plans. When all is said and done, 2021 could represent a high point of the IPO market that may not be matched for years to come.”
Ultimately, I feel it is still too early to tell if the IPO boom is on its last legs or if it can build up a new head of steam in 2022. However, I see good cause for employing caution when approaching IPO investment opportunities in the year ahead.
