IPOs are back with a bang as we approach the fiscal year end. IPO activity is hitting record highs after sluggish activity in the 1st half of 2020 due to the pandemic.
In Ernst & Young’s latest quarterly report, EY Global IPO Trends: Q3 2020, this last quarter came to be the most active third quarter in the last 20 years by proceeds and the second-highest third quarter by deal numbers.
Judging from the year-on-year data, market liquidity and investor sentiment drove deals and proceeds up this quarter. But what does all this mean for VCs?
Global IPO trends today
Global IPO activity grew by a mile this last quarter. Asia-Pacific saw the biggest deal action this quarter, surpassing 2019 YTD numbers with a total 554 IPOs (29% year-on-year increase) raising $85.3 billion in proceeds (88% increase).
Taking second place was the Americas, with a total of 188 deals (up 18%) raising $62.4 billion in proceeds (up 33%).
The EY US report notes that IPO activity in Q3 accelerated partly due to COVID-19 pandemic-related government stimulus policies such as, for example, employment subsidies provided to airlines.
While third quarters traditionally show slow IPO activity, this year overall showed great exception, proving to have the most active Q3 in IPO activity in the last 20 years.
Which sectors dominated?
COVID has had a tremendous effect on IPO activity, with technology, industrials, and health care leading YTD global sector activity. Globally, a total 537 IPOs in these three sectors alone raised a whopping $110.5 billion.
The report attributes this growth to three main factors: one, investor sentiment, as seen in the technology and health care sectors – two spaces that were put in the spotlight directly because of the pandemic; two, highly liquid markets with volatility rising back to normal; and three, index valuation levels and low-interest-rate environments going back to pre-crisis levels.
What does this mean for VCs?
It’s in a VC’s best interest to wait for the right market conditions before letting a portfolio company go public to maximize the returns on their funding. This proves as an effective exit strategy because this is the point where they can make an exit anytime they desire, now that their early stage company has access to sufficient funding.
At the beginning of the pandemic, we were thrown into a lean economy where investor confidence was in a lull. During such times, there were few VC-backed IPOs. But in Q3, we saw the volume of IPO deals reach sky-high levels.
IPO nailed it across the board, especially within tech, industrial, and health care after a half-year of inactivity. This boom all points to how the world has adapted to “the new normal,” or the sudden realization that companies and industries can move forward despite health and safety-related restrictions.
Consequently, this represents an almost equal growth for VCs. The more small cap IPOs happening, the more VCs are enjoying successful exits and can re-deploy their capital in the market.
Small caps to watch out for
More often than not, investing in small caps results in bigger yields over the long run. A couple of small caps stand out from the crowd for their huge growth potential. Among some of them are:
Big Lots Inc.
American retail company Big Lots ranks among the fastest-growing small cap stocks. The company operates big-box discount retail stores and offers an assortment of merchandise, including consumables, furniture, seasonal products, housewares, electronics, and more. As of October 30, the company reported a 6,960% increase in EPS growth, with a market cap of $2.76b selling at $52.87/stock.
TTM Technologies Inc.
TTM is one of the world’s leading printed circuit board manufacturers, creating circuit boards for a variety of electronics products such as routers. The US-based company reports a 5,870% EPS Growth, with a market cap of $1.295b selling at $12.12/ stock.
Textainer Group Holdings Ltd.
Textainer Group is a holding company that purchases, leases, and resells intermodal shipping containers. The company makes most of its profits from leasing dry freight containers, and it has proven to be an effective business model so far. The company boasts an EPS Growth of 2,900% and a market cap of $830.4m, selling at $15.58/stock.
Needless to say, 2020 has been a turbulent year for companies and VCs alike. From everything we’ve seen, it’s safe to say that we’re going to see the same kind of volatility in IPO activity next year, as the world fully adapts to what we refer to as the “new normal”.
That said, VC-backed IPOs, especially in the U.S., have always been big contributors to economic growth and employment in the private sector. As most companies going public each year are supported by venture capital, many founders will still consider this route one of the best ways to scale their business.