IPO update: The SPAC boost

IPO activity picked up in the second half of 2020 as well as thus far this year.

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The IPO market ground to a halt this time last year, as the unfolding COVID-19 crisis sent companies running for cover instead of moving forward with their plans to go public. But that dynamic changed by the second half of 2020, with new IPO deals and proceeds raised soaring for the full year, relative to prior years.

Here's what happened in the IPO market during a historic year.

IPO performance skyrockets

The Renaissance IPO Index surged 110% in 2020, blowing past the S&P 500's 16% gain.1 The average IPO gain of 76% was the highest in 20 years.2

Although the IPO market ended up posting stellar returns for the full year, it appeared early on as if 2020 could end up as one of the worst years for IPO issuance in a long time: Less than 30 deals had closed by the end of March 2020. But that number jumped to 218 by year-end, raising over $78 billion in proceeds—a 38% and 69% year-over-year increase in number of deals and proceeds raised, respectively (see IPO activity rebounds during volatile year chart).2

Health care and tech companies represented nearly three-quarters of IPO issuance last year, and a record 20 IPOs raised more than $1 billion.2 The 10 largest IPOs in 2020, by deal size, were:

  • Airbnb (ABNB)—$3.5 billion raised
  • Snowflake (SNOW)—$3.4 billion raised
  • DoorDash (DASH)—$3.4 billion raised
  • Palantir (PLTR)—$2.6 billion raised
  • Warner Music Group (WMG)—$1.9 billion raised
  • Rocket Companies (RKT)—$1.8 billion raised
  • XPeng (XPEV)—$1.5 billion raised
  • Unity Software (U)—$1.3 billion raised
  • Li Auto (LI)—$1.1 billion raised
  • GoodRx Holdings (GDRX)—$1.1 billion raised

In addition, special purpose acquisition companies (commonly known as SPACs) were a major contributor to the IPO market's momentum last year. Indeed, it was the biggest year on record for SPAC IPOs.

Several big IPOs have already taken place in 2021, which the largest by proceeds include Bumble (BMBL), Qualtrics (XM), Poshmark (POSH), and Affirm (AFRM), as well as SPACs like Clover Health (CLOV). Looking ahead for the remainder of 2021, several well-known companies are eyeing a potential IPO. This list includes Instacart, Robinhood Markets, Stripe, Roblox, Coinbase, and UiPath.

Caution is warranted

If you have an interest in IPOs, you should proceed with extreme caution. Of course, IPOs can generate buzz among investors, particularly for so-called "hot issues" that garner a lot of interest.

But beware of getting caught up in the hype. IPO investing can be complex, and may be suitable only for experienced investors. Be sure to consider any opportunities within the constraints of your unique investment goals and risk tolerance.

There are unique considerations to keep in mind when it comes to investing in IPOs. For instance, the stock of an IPO can be particularly unpredictable on its first day—and also the first few months—of trading. For every AT&T (T), Alphabet (GOOG), and Visa (V) that had successful IPOs and are now entrenched leaders in their respective industries, there is a long history of initial public offerings that have not performed well.

There is also the issue of access to IPOs. "For the individual retail investor, getting a piece of an IPO at the stated initial offering price will likely prove to be a challenge since the majority of the shares are typically scooped up in large blocks in advance by institutional investors," according to Morningstar. "The close price after the first day of trading may provide a better indication of the price at which shares are available," Morningstar adds.

Moreover, extracting long-term value out of IPOs, even successful ones, can be tricky for a retail investor. For example, suppose you identify an IPO that you find attractive as a long-term investment, and the price at which it begins trading on the IPO date is $20 (which is by no means a given). If you were to buy the shares at around this price, and by the end of the IPO day the stock price had risen to $30, you might think this is a winning trade.

But take a step back. This means that the company and its underwriters (a financial group, typically a bank that is responsible for determining the market price of an IPO) underestimated demand for the company's stock. Therefore, the company lost out on the opportunity to raise more money to grow its business, because the IPO was mispriced (i.e., instead of receiving, let's say, $30 a share from the public, it will have received only $20 a share). In this scenario, if you were looking for short-term profits, great. If you are a long-term investor, however, a mispriced IPO may not be in your best interest.

Do your homework

IPOs and you

Individual Fidelity investors can sign up to participate in an upcoming IPO (there are eligibility requirements).

Like any other investment, before making a decision regarding an IPO, you should review your investment goals and conduct a thorough analysis of the company, along with its growth prospects. Beyond the idiosyncratic risks associated with an individual investment opportunity, there are distinctive risks associated with IPO investing—each IPO is unique, and it needs to be evaluated independently to determine its investment potential.

For example, one of the primary difficulties that some investors face when it comes to researching companies that have not yet become public is the extent to which there is access to information. Publicly traded companies in the US, for example, are required by the Securities and Exchange Commission to disseminate financial information quarterly. Private companies are not required to do the same (although they do have SEC-mandated disclosure requirements that must be made available to prospective investors in advance of an IPO—a key source of information for an IPO investor is the prospectus). Perhaps more importantly, individual investors may not have the time or skill needed to evaluate all of the available financial data and to consider the implications to future operating results of the transition from a private to a public company. Consequently, for those investors who do not have access or the skill to analyze all of the financial information necessary to build an informed view of a potential IPO opportunity, it may be hard to fully assess the company's merits as a sound investment.

One way that you might be able to navigate the intricate IPO waters is to consider a managed fund. Most investment management companies have the research capabilities and resources needed to conduct this analysis, which many individual investors are not able to do. And, as always, it is important to build a diversified portfolio, given that one of the risks of IPOs is the stock-specific risk that is present in any concentrated, individual investment.

Next steps to consider

Research IPOs

View offerings, download a prospectus, or participate.

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