The IPO Surge

Even in the face of Covid’s Delta variant, many firms have sought to list on America’s public stock exchanges.  This deluge of initial public offerings (IPOs) carries two seemingly contradictory signals:

  1. It reveals tremendous business optimism, on both the economy and for future profits. 
  2. It announces that the managements of these firms see stocks today as pricey enough to give companies publicly listing themselves more money for their shares than, say, an internal assessment might value them.  Certainly, firms would not readily list if they thought the reverse were true.

The flow of funds for new IPOs this year could easily be described as a flood.  In the eight months through August, almost 280 private companies have listed themselves on a major exchange.  If this pace keeps up during the rest of this year, some 420 IPOs will have taken place in 2021 –– almost twice last year’s number –– and barring some major economic or major market setback, it looks as though the pace will continue to the end of the year.  An informal count among financial people reveals at least 100 companies that have either announced their intention to float an IPO or have indicated interest in doing so.  Nor do any of these figures include the SPAC IPOs, which, according to an accounting done by SPAC Research, amount to some 473 so far this year, already some 70 percent higher than all of 2020.  More on SPACs here.

In one important respect, all this activity is an upbeat judgment on the future: Managements raise money this way because they believe the funds can be well deployed for profitable expansion of their business.  They certainly do not raise capital on such a grand scale just to let it sit idle, especially with inflation now eroding the real value of money.  Nor, with interest rates and bond yields as low as they are, are managements likely to raise equity capital merely to put it into savings accounts or store it in fixed-income investments.  Of course, each firm makes its own decisions about its products in its own market niche, but this outpouring of IPO activity suggests the kind of general confidence that brings real investment and drives the overall level of economic activity upward.

On a less positive note, there is the question of valuation.  If the listing decision reflects a long-term judgment that there are opportunities for deploying this new equity capital, the IPO’s timing can reflect an assessment of market valuations.  If management determines that market levels are high, higher perhaps than fundamental assessments of their company’s value, they will see an opportunity to raise more than they otherwise could, and so they rush to an IPO.  If enough companies do the same, they will crowd the year –– as they have 2021 –– with IPOs.  It is only  judgment, of course, but this year’s outpouring does show an implicit vote by diverse managements that stock market prices might have risen beyond levels that a hard-headed assessment could support.  Such a judgment may have missed some considerations.  It could be that the relative valuations only apply to the listing companies, and perhaps those in similar lines of business, but not to the entire market.  Perhaps those taking the view that market valuations are high have failed to consider certain macro considerations –– for instance, the commitment by the Federal Reserve (Fed) to continue pouring liquidity into the markets despite the increasing inflationary pressure.  If that is the case, then none of this means that a market correction is imminent.  Nonetheless, it is yet one more consideration for any investor in assessing whether the current rally, already nicked in the week of September 20, can continue unabated.

So, the picture is far from conclusive.  There are no assurances.  (There never are.)  What the IPO flood does reveal is that a large and diverse group of presumably savvy businesspeople see a bright economic future, and they also see a market that might be pricing itself for something even brighter than the current reality.  It adds a wary element to any investor’s assessment of near-term market gains, but because most readers of this blog are long-term investors, that aspect should be of only passing concern. 

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