In 2019, the ASX IPO market floated anemic $2.7 billion worth of deals. For context, the annual average over the previous 8 years is ~$6.5 billion. The start of 2020 looked like a continuation of the trend; then the Coronavirus hit equity markets in March, and it looked like things could get even worse.
Surprisingly, this was not the case with the corporate financiers kicking things into gear with $3 billion of issuance in the fourth quarter alone in 2020 (the entire year saw $4.7 billion issued). This momentum is set to continue in 2021 with a raft of companies looking to go public. Which begs the question, why are companies preferring the public route when remaining private has been in vogue for the best part of a decade?
It starts with low interest rates
In 2011, Australian interest rates sat at 4.75% for most of the year. Since then, the RBA has slowly cut rates to record lows of 0.10% in Nov 2020. This monetary policy action has had the desired effect of investors withdrawing their funds from bank accounts and redeploying them in search of yield.
Easy access to platforms
Technology has been disrupting industry for thousands of years, with the Silicon Age accelerating this disruption. Financial markets are not excluded from this change. Just over 20 years ago you needed a human broker to invest in the stock market. The costs of this were prohibitive and deterred many from opening accounts. This inefficiency resulted in the innovation of online broking platforms driving brokerage costs to the bottom with trades on some platforms being completely free. Unsurprisingly, this has led to an influx of new investors in public markets.
The ride of Retail Investors
Private equity markets are ring fenced, with access limited to “sophisticated” and “professional” investors. However, once a company is public, it opens up the gate for retail investors to join the party. Couple this fact with the new broking platforms available and it creates a perfect storm.
Valuation is the Fulcrum.
Equity markets are close to record highs with valuation multiples being a primary reason for this, especially when you consider the current macroeconomic climate. As an example, the Buffett Indicator (US stock market valuation to GDP) is currently 219% which is 2.6 standard deviations (or 76%) above the historical average. Businesses may raise capital for any number of reasons, but seeking the best valuation is a motive that underlies all transactions. Hence, it makes sense that businesses are pursuing an IPO to obtain the best possible valuation for existing shareholders.
Make hay while the sun shines.
In 2021, markets are continuing to trade at record valuations boosted by monetary and fiscal stimulus due to the pandemic. On the back of this, expect to see more private businesses seeking an IPO to raise capital to realise their expansion goals. The pipeline is already starting to build. Moreover, the performance of the 2020 IPO market was ~50% gain, which shouldn’t dull the appetite of investors to invest in the shares of these new offerings.
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