The record for initial public offerings in one year will be smashed in 2021 as IPO stocks keep making headlines.
XA big reason for that is the tsunami of startups that have come public this past year through Special Purpose Acquisition Companies, or SPACs.
The previous record for IPOs done in a year was set in 2000, when the technology industry shifted into fifth gear thanks to the rise of the internet. IPO stocks were flying out the door, including companies with little more than an internet idea and no revenue — the infamous dot-com era that led to the dot-bomb bust.
Exuberance lifted the IPO count in 2000 to 406 and raised $93 billion, a record that's stood for 21 years.
Robust Backlog Of IPO Stocks
But 2021 looks to shatter that record. Renaissance Capital estimates there will be 875 IPOs this year — more than double that of 2000. This includes 500 SPACs and 375 traditional IPO stocks. Even more impressive, Renaissance expects a whopping $250 billion in proceeds this year, nearly three times that of 2000.
The estimate by Renaissance assumes the stock market maintains stability. Because as the stock market goes, so goes the IPO market.
"Although trading has recently been volatile, if the equity markets stay healthy there is no reason to think things will slow down," said Avery Spear, an IPO market analyst at Renaissance Capital, which manages two IPO-focused exchange traded funds. "There is a very robust backlog heading into the fourth quarter and we expect issuance to stay active in the fall," she said.
IPO Stocks In Third Quarter Raise $27 Billion
In the third quarter, there were 94 IPOs that raised $27 billion. By deal count, it was the busiest third quarter since 2000.
Technology and health care were the most active sectors, producing a combined two-thirds of IPOs. Technology IPOs produced the most proceeds at $10.8 billion, more than double that of the next closest sector.
Health care IPO activity was driven primarily by biotechs, though health services, health equipment, and diagnostics also made progress.
Among notable IPO stocks in the third quarter were Toast (TOST), Freshworks (FRSH) and Robinhood Markets (HOOD).
The Toast IPO raised $870 million for the fintech firm as shares rocketed 56% on the first day of trading. Freshworks raised $1 billion as its stock jumped 32%. Robinhood raised $2.1 billion and popped 24%.
The third-quarter performance followed an explosive second quarter that saw 118 deals and raised $40.6 billion.
Looking ahead, some 114 companies are on file for IPOs and looking to raise more than $20 billion, Renaissance said.
IPO Candidates In Fourth Quarter
Likely IPO candidates in the fourth quarter include electric vehicle maker Rivian, mobile payment company Stripe, grocery delivery company Instacart, Indian online retailer Flipkart and semiconductor company GlobalFoundries.
Others include Brazilian digital bank Nubank, which is backed by Warren Buffett's Berkshire Hathaway (BRKB), artificial intelligence company Databricks and global investment firm TPG.
The biggest reason the IPO market has been on fire is SPACs. They aren't your typical IPO. SPACs start out as shell companies that raise money by issuing stock, which will be used to acquire a privately held company and turn it public.
Once the deal is complete, the SPAC is merged with the acquired company. It then begins trading under a new ticker representing the freshly minted public firm.
"SPACs provided an opportunity for a meaningful return on investment and when that exists people move quickly," said Brandon Bortner, a partner in the securities and capital markets practice at Paul Hastings. "It also provided a quick way for companies to raise funds to make their company more competitive."
The craze in SPAC IPOs began in 2019's fourth quarter with the highly successful offerings of spaceflight company Virgin Galactic (SPCE) and DraftKings (DKNG), an online betting company. More recent ones include electric car company Lucid Group (LCID) and personal finance company SoFi Technologies (SOFI).
While SPACs are not new, they have gotten a renewed focus. Among the catalysts was the Covid-19 pandemic, which shut down the IPO market for about two months. That happened as the IPO market was accelerating and building a backlog.
SPAC stocks helped to relieve the backlog, then it became a craze. Typically, about 15 SPACs were created per quarter. In the third quarter of 2020 that zoomed to 82, jumping to 129 in the fourth quarter, then shooting to a record high of 298 in the first quarter of this year.
It plunged to 64 in the second quarter, then rebounded to 79 in the third.
SEC Casts Wary Eye On SPAC Stocks
But a big party attracts police. In this case, the Securities and Exchange Commission came knocking.
In April, the SEC began to tighten SPAC accounting guidance, bringing SPAC creations to a screeching halt.
This past week, according to Reuters, the SEC has told top auditors of SPACs to account more strictly for public shares in these shell companies. Worries that the SEC is looking for ways to upend long-standing practices in the SPAC market caused the stocks that were spawned by SPACs to tumble.
Prior to that, in February, concerns grew that the SPAC market was near a bubble as a result of rampant speculation causing a rapid rise in some SPAC stocks.
The result of that is evident in the performance of the Defiance Next Gen SPAC Derived ETF (SPAK). It was the first ETF to offer exposure to SPACs.
Since hitting a peak in February, the SPAK ETF is down 34%.
Recent IPO stocks are where you often find some of the market's best stocks. New IPOs are typically in their early stages of growth. Big earnings growth potential is generally what fuels an IPO stock's price performance. IBD's IPO Leaders section has special screening criteria to find up-and-coming stocks with strong fundamental and technical traits.
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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