Cash from more than $1 trillion in savings is creating pent up demand for IPOs, according to Nerissa Brown, associate professor of accountancy at Gies College of Business and a nationally recognized expert on financial reporting and IPOs.
Cash from more than $1 trillion in savings is creating pent up demand for IPOs, according to Nerissa Brown, associate professor of accountancy at Gies College of Business and a nationally recognized expert on financial reporting and IPOs.
“Bear in mind that the stock market reflects investor expectations about future economic performance, and so many investors do expect us to come out of the pandemic, hopefully sometime in 2021, and it is predicted that unemployment will return to pre-pandemic levels,” said Brown.
She says investors looking for superstar stocks in which they can invest cash and earn a great return contributed to a record year for IPOs in 2020. The surge was driven by tech unicorns, pharma, and life sciences offerings and Special Purpose Acquisition Companies (SPACs), which are non-operating shell companies that are funded and taken public by a group of sponsor investors or a hedge fund. These SPACs then look for a private company to merge with or acquire, usually within a set time frame of two to three years.
“Even though SPACs fueled the IPO market, the first day returns for these companies were very marginal, averaging out at less than 2%,” she said. Traditional IPOs, on the other hand, generated first day returns to the tune of 42% in 2020, almost double the first day return generated by IPOs in 2019. But the bulk of these IPOs where loss makers. “In 2020, roughly 80% of traditional IPOs that went live had no positive income,” she noted.
Brown addressed IPO challenges and opportunities in “IPO-ing During a Pandemic: A Financial Reporting Perspective,” a webinar that is part of Gies’ ongoing series. In it, she explained the different types of IPOs and performance trends as well as compared two tech unicorn offerings with similar deal sizes that both launched in December 2020: Airbnb and Doordash. While Doordash’s offer price was $102, today’s stock price has almost doubled for a market cap of $62.97B. Airbnb’s stock performance was more spectacular. Today’s stock price is over 2.5 times higher than its offer price of $68 resulting in a current market cap of $115.15B.
You can view the full webinar presentation here.
