What’s Behind the Record-Breaking IPO Market
Global issuance volumes are near record levels:
- Street-wide issuants are just north of $1 trillion year-to-date as of September 2021, representing a 39% increase versus the same period in 2020.
- Total 2021 issuance is tracking closely to the 2020 record high of $1.16 trillion.
- Americas issuance stands at nearly $450 billion (+35% YoY).
- EMEA issuance exceeds $200 billion (+56% YoY).
- Asia issuance totals $365 billion (+35% YoY).
Fall market activity forecasts indicate high volume:
- September is projected to be highly active, with Americas issuance hitting $22 billion in a single week, nearing half of September 2020's record $51 billion.
- Goldman Sachs anticipates a robust Q4 2021 driven by a deep IPO pipeline, marketed follow-ons, and secondary monetizations by private equity/venture capital firms.
- Convertible offerings are seeing increased interest due to low interest rates acting as an opportunistic environment for issuers.
Drivers for current IPO appetite:
- Markets are in a "Goldilocks scenario" characterized by a stable macro backdrop and significant multiple expansion in year-to-date indices.
- Buy-side capital formation is diversified, involving mutual funds, ESG dedicated funds, pension funds, strategic funds, and hedge funds.
- Issuers are utilizing multiple pathways to go public, including traditional IPOs, direct listings, and SPACs, allowing for flexibility based on specific corporate objectives.
SPAC market evolution and outlook:
- SPAC issuance volume has corrected from Q1 2021 record highs due to market "indigestion" and increased regulatory scrutiny, a development viewed as healthy for sustainability.
- Despite the pullback, SPACs remain a viable product with expected future innovation and evolution in product composition and criteria.
- Goldman Sachs maintains conviction that all three public listing methods (IPO, direct listing, SPAC) will continue to coexist and evolve.
Deal performance and market absorption capacity:
- Global IPO day-one performance averaged 35% in Q1 2021 and 26% in Q3 2021, remaining compelling despite market volatility.
- Goldman Sachs is confident the market can absorb the expected record flood of issuance in September and Q4, citing the high quality of issuers in the pipeline.
- Risks of investor fatigue are acknowledged, but the firm believes supply will be absorbed efficiently.
Key macro and technical risks being monitored:
- Fed policy: Focus is placed on tapering signaling and the speed/volatility of rate movements rather than rising rates themselves, specifically regarding their impact on investor sentiment.
- Growth asset valuations: Concern exists regarding the sustainability of extremely high multiples for growth-oriented assets in the face of rate volatility.
- Tax reform: Potential changes to corporate and capital gains taxes are being tracked for their impact on investor willingness to underwrite primary versus secondary offerings.
- Inflows: Monitoring the split between passive and active inflows and the disparity between index multiples and portfolio manager entry multiples.
- Investor positioning: Mutual fund cash allocation is at a record low of 1.6% (vs. a historical average of 2.5%), suggesting highly selective or fully invested behavior.
Retail investor role:
- Retail investors remain a significant force in the IPO space as follow-on buyers and are expected to stay active in equities.
- Goldman Sachs is focused on understanding retail psyche and harnessing retail demand as a distribution channel for issuers.