It was another big week for the
The index finished up 3.4% and it’s now gained 4.9% on the year.
But there’s one missing ingredient from investors astonishing show of tech optimism: initial public offerings. The IPO “window” isn’t entirely closed, but the pickings have been slim. There were 21 new offerings in January and February combined, but just a dozen deals since, seven of them health-care companies. (I’m excluding SPACs, or special purpose acquisition companies, which go public to raise capital with the intention of later finding a company to buy.)
But get ready. More deals are on the way, and soon.
“The IPO engine is starting up again,” says Kathleen Smith, chairman and co-founder of Renaissance Capital, an IPO-focused research and investment house. Her firm runs the
exchange-traded fund (IPO), which owns companies that have been public two years or less. The ETF hit an all-time high last week, and it’s up 14% this year. Its portfolio includes stocks that have thrived during the downturn, including
Zoom Video Communications
(MRNA), to name a few.
“When a basket of newly public companies trade that well, it’s a positive barometer for upcoming IPO issuance,” Smith says. “When recent deals outperform, the window opens up.”
Sure enough, this past week, there was an IPO from online life insurance broker
(SLQT). It was a hot deal: SelectQuote had planned to offer 25 million shares at $17 to $19 each, but upped the offering to 28 million shares priced at $20. The deal raised $360 million for the company, with the remainder going to selling shareholders. The stock closed its first day of trading on Thursday at $27.
To be sure, this was no typical Silicon Valley IPO. SelectQuote is 35 years old and based in Overland Park, Kan. It’s been owned by private equity, not venture capital. But the strong debut just might break the logjam for tech listings.
There are other hints of an initial offering rebound. Tech companies are raising money in secondary offerings. —
Ping Identity Holding
(ROKU) have all tapped the markets for fresh capital. Lofty multiples and strong stock performance amid economic carnage points to a market hungry for new ideas, and, potentially, new issues.
Lise Buyer, founder of the Class V Group, an IPO consulting firm, says many companies are working behind the scenes and getting ready to hit the market. IPO investors continue to want companies with solid businesses, sustainable competitive advantages, big addressable markets, and business models that are profitable or close to it.
Buyer says investors will be looking in particular at how companies have endured the last few months. Are customers still paying? Are they reducing services? What’s happened to receivables? Buyer also notes that volatile markets make pricing IPOs difficult. But volatility is coming down. The Cboe Volatility Index closed the week at 28, down from its March peak of 83.
She also thinks the IPO calendar will soon fill up. “People targeting IPOs in 2021 have the gears turning,” she says. “The market is telling you things are going to get better.” Buyer thinks we could see a few deals in the near-term, with a more significant pickup in the fall, once June quarter results are in the rearview mirror.
Colin Stewart, vice chairman and global head of technology equity capital markets for Morgan Stanley, says the key is finding ways to forecast coming quarters. “People are trying to figure out what business will look like,” he says. Make an overly optimistic prediction and you run the risk of an early reputation-damaging earnings miss. Get too conservative and you can hurt your initial valuation.
But an improving equity market and the healthy reception for SelectQuote could embolden some companies to take the next steps in the IPO process, as soon as this coming week. A handful of tech companies have already filed IPO paperwork, meaning their listings could happen quickly.
Those candidates include ZoomInfo, a subscription-based database company; Vroom, an online user-car dealership; Procore Technologies, which makes construction management software; Shift4 Payments, a payment processing company; and Warner Music Group.
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There are likely to be more companies filing for IPOs soon. Among the possibilities are Snowflake, a cloud data platform company, and Asana, which makes cloud-based work management tools. Also widely expected to file are web hosting company Rackspace, a former public company now owned by private-equity firm
Apollo Global Management
(APO), and TPG-owned security software firm McAfee, also making a second trip to the public market.
To be clear, the IPO market won’t just be picking up where things left off prepandemic. Widely anticipated IPOs from lodging firm Airbnb and food-delivery company DoorDash, for instance, seem unlikely in the near term.
Also, there’s no more talk about direct listings, in which companies list their stock without raising new funds. Everyone can use the cash these days. One more change: Say goodbye to lengthy IPO roadshows—breakfast with investors in Denver, lunch in Kansas City, and dinner in Dallas. The world has adapted to virtual meetings, even when it comes to raising billions of dollars through IPOs.
Write to Eric J. Savitz at firstname.lastname@example.org