Why Is The IPO Market Booming In This Insanity?
By Lior Ronen (@Lior_Ronen) | Founder, Finro Financial Consulting
There's an insane discrepancy in capital markets right now.
We're in the middle of a global pandemic, and a macro-economic crisis is upon us.
However, more and more companies choose to go public, contrary to the traditional mindset that assumed companies should freeze every aspect of the business until things become more evident.
This year, 111 companies went public and raised $37.8B, which is 81% of the volume last year, where everything was strawberries, honey, and flying unicorns compared to 2020.
The impressive IPO stats don't include yet the many upcoming initial public offerings that we expect. I believe that we will exceed the volume and aggregated proceeds of 2019.
What drives this incredible boom in the IPO market?
Awareness and acceptance of new alternative paths go public on top of the traditional IPO and help many companies reach the market. However, it does not explain why these companies want to become public right now in the first place. To understand that, we need to look at another booming sector - the SaaS sector.
The different restrictions we experienced worldwide due to COVID drove many people to consume more products and services online than before. Online businesses like eCommerce, cloud, and SaaS businesses succeeded in remaining their businesses in-tact and hardly impacted this environment.
As companies report their quarterly earnings these days, we see a significant increase in online businesses' revenues as we saw from Zoom, Workday, Salesforce, and many other tech companies. The growing revenues strengthen SaaS businesses' position as immune to this global crisis and as safe-haven assets in this specific situation.
The pro-SaaS investment drove SaaS share prices higher, as reflected by the cloud index's phenomenal year-to-date return. As the SaaS valuations surge, more high-growth SaaS startups want to become public companies.
These SaaS businesses become more sophisticated and leverage their private-market, pre-IPO valuations to improve their position in front of public investors and push their IPO prices up.
Businesses in 2020 that go public don't follow the traditional IPO blindly but utilize the different alternatives available to join the stock market.
The incredible correlation
As I mentioned above, the boom in SaaS stocks pricing attracted new SaaS IPOs that are tracked in both the cloud and IPO indexes and the ETFs that follow these indexes.
It drove the correlation up to 0.98, as can be seen easily in the chart below. Both of the indexes outperformed the S&P in ~20x year-to-date (2x than the Nasdaq).
This is how the IPO market became de-facto, a proxy or subset of the SaaS sector.
Of course, this is not necessarily a bad thing. However, when investing in the IPO index these days, you need to realize that you are investing in SaaS stocks. If you already hold other SaaS stocks or indices, you might increase your exposure to this niche even further this way.
Wrapping Up
These are my $0.02 about the current state of the public markets.
Have additional insights?
Let me know in the comments.
