On the back of a few years, with a limited number of IPOs, 2020 turned out to be one of the best years in recent history for the IPO market, and 2021 proved to be even better. As of mid-December, the U.S had already surpassed the…
previous record set for IPOs in the 1990s, with almost 1,000 companies coming to the market raising $315 billion.
Special purpose acquisition companies, or SPACs as they are commonly referred to, played an important role in this development by helping many young companies go public. Some of the most notable market debuts in 2021 include Roblox Corp (NYSE:RBLX), Coinbase Global (NASDAQ:COIN), Rivian Automotive (NASDAQ:RIVN) and Robinhood Markets (NASDAQ:HOOD).
Exhibit 1: IPOs reached a record in 2021
There are several underlying assumptions as to why many companies are going public today in comparison to previous years. The attractive valuation level of the market is one of the major reasons behind this IPO boom, as elevated price-to-earnings multiples (denoted from the blue line in Exhibit 1) are helping young companies raise better-than-expected capital in the market.
Zero-commission trading introduced by major stockbrokers is another reason behind this IPO boom as cost-effective investment solutions have prompted many new investors to buy stocks for the first time.
The next factor is the rise of special-purpose acquisition companies, denoted by the yellow in the above chart. As per Morningstar, more than 700 SPACs went public in 2021, which is 5 times the number from the year before.
Exhibit 2: the surge in SPAC listings
SPACs, also known as blank check companies, have no commercial operations and stated targets and are formed solely for the purpose of raising capital through an initial public offering to invest in another company later. These companies are capable of facilitating private companies to go public faster while allowing public investors access to markets previously only available to accredited investors, and SPACs have become increasingly popular in recent years.
In 2019 alone, SPACs raised a staggering $13.6 billion, which was four times the $3.2 billion raised in 2016. The popularity of SPACs reached new highs in the last couple of years. In 2020, 247 SPACs raised $80 billion from investors, and in the first quarter of 2021 itself, a record $96 billion was raised by 295 newly formed SPACs.
Understanding the key economic factors relevant to IPO investors in 2022
As noticeable from Exhibit 1, there have been a large number of companies going public in the 1990s, which was a period marked by low inflation around 3% while the real interests rates were positive at around 6%, and this was the period leading to the tech bubble.
Exhibit 3: Low rates support current valuations better than the ‘90s
Towards the end of 2021, and as of today, U.S. inflation is on the rise, and…
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