Traders are hopeful the IPO market can repeat its record first half

Traders on the floor of the New York Stock Exchange.

Source: NYSE

The floor of the New York Stock Exchange, which was quiet last year, has suddenly come to life.

Traders have returned, restrictions have been eased to allow more visitors to the floor, and the IPO business is booming.

“We saw exciting and innovative companies come to the market in the first half of the year and we expect the IPO pipeline to continue through the second half,” said Peter Giacchi, director of DMM floor trading at Citadel Securities.

Busy week for IPOs

The IPO business, which lagged the SPACs for a good part of 2020 and early 2021, has returned in a big way.

This week alone, 18 companies are planning to go public, including Chinese ridesharing company Didi Global in the biggest IPO of the year (Didi reportedly cost $ 14), along with donut chain Krispy Kreme, cybersecurity company SentinelOne, travel security firm Clear Secure and the online legal platform LegalZoom.

That’s most companies in a single week since 2004.

“The setup couldn’t be more perfect,” said Santosh Rao, head of research at Manhattan Venture Research. “It’s a risk-taking mood, with markets at new highs. And when the VIX [Volatility Index] is below 20, it has always helped the market. “

This week’s sudden corporate rush has another reason: the end of a strong quarter.

“You want the company out by the end of the quarter because if you wait until the next quarter you have to release updated financials,” said Rao.

The IPO rush will likely begin the second half the way it ends the first half: with a bang.

First half a monster for IPOs

Almost however the data is broken down, the first half of the year was a monster for the IPO market, with 213 IPOs grossing over $ 70 billion.

“That’s above the annual average for the past 10 years,” said Matt Kennedy, Senior Market Strategist at Renaissance Capital, who advises clients on IPOs and manages the Renaissance Capital IPO ETF. “We haven’t seen this level of activity since 1996-2000.”

It’s not just the number of IPOs: the dollar was high. There are 16 IPOs that grossed $ 1 billion or more in the first half, and Didi and SentinelOne said they’ll likely make it to 18.

After a slight slowdown in May, June was also the busiest single month since August 2000.

These numbers are even more remarkable when you consider that SPACs continue to compete for listings with IPOs. However, the SPAC business has slowed significantly. Fifty SPACs raised $ 9.3 billion in the second quarter, an 89% decrease in revenue from the previous quarter.

Rewards for IPO investors, but mostly on the first day

IPO investors were rewarded: Without two soaring micro-caps, the average IPO in the second quarter achieved a return of 26%, according to Renaissance Capital.

However, the majority of this return (24%) was achieved on the first day of trading.

“This is not ideal for retail investors,” because retail investors buy in on day one, so some of the return is available on day one, but a good portion is not, Kennedy said. “The bulk of the returns go to the institutional buyers.”

The Renaissance Capital IPO ETF, a basket of around 60 of the recent larger IPOs, fell in May along with many speculative tech stocks but has since rebounded into positive territory for the year, but is still trailing the S&P 500.

Second half starts strong

The IPO pipeline currently includes 87 companies aiming to raise more than $ 20 billion in total, including Mark Wahlberg-backed F45 Training gym and luxury club operator Membership Collective, owner of Soho House.

There are also many private companies that have not submitted this or have submitted this confidentially in the coming months, including:

Robinhood (stock trading app)
Warby Parker (prescription glasses)
Chobani (Greek yogurt)
Flipkart (India’s largest online retailer to be spun off from Walmart)
Instacart (food delivery platform)
GlobalFoundries (semiconductor designer)
Dole Food Company (global fruit and vegetable company)

Is the flood of IPOs causing problems for buyers?

Kathleen Smith, chairwoman of Renaissance Capital, fears business may be a little too good.

“There is so much activity that a lot of our customers are complaining that they can’t see everything, and that’s bad,” Smith told me. “That means they can’t do all of the homework they have to do.”

“You need quality control. The only quality control is when a fund manager does their homework or a market event occurs that causes recent IPOs to decline quickly.”

Can the IPO industry repeat the historic performance of the first half of this year?

“In theory, we’re set for another explosive quarter, but it’s a volatile space,” said Kennedy.

“The IPO market can spin quickly, and if returns for investors decline, it could ruin the entire market,” he said.

In fact, IPOs fell in May as speculative tech stocks, many of which were recently IPOs, waned on inflation concerns. You have since recovered.

“These young companies are trading in the future profitability potential,” said Rao. “You are very sensitive to a rise in interest rates, but right now there is not much fear of much higher rates. So it is still risky. FOMO [Fear of Missing Out] is the biggest.”

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