on February 23, 2021
Looking Ahead to 2021 – Top IPO Picks
2020 was the biggest year for IPOs since 2014, even after excluding SPACs. According to Renaissance Capital, the average IPO in 2020 returned 75%, the best performance since the late 90s bubble years. The Renaissance Capital IPO index has gained an impressive 112% in 2020. After a record-breaking 2020, IPO activity in 2021 is expected to remain strong. There are still more than 500 unicorns in the private market and roughly 71 companies have selected bankers or filed confidential paperwork to go public, according to market data from CB Insights.
A major silver lining during this pandemic has been a deeper recognition of secular transformational technologies. These include the second and third iterations of cloud computing, digital transformation across a wide swath of verticals, electrification of cars and the growing ecosystem in the vertical, data management, and BI applications based on artificial intelligence and machine learning, last-mile logistics, EdTech, and a number of other tech-enabled services. Given the large total addressable markets for all these technologies, and minimal changes in the underlying macro conditions that powered the IPO activity in 2020, we expect another strong IPO performance in 2021.
A number of companies have already announced their plans to complete their IPO in 2021, including Coinbase, Robinhood, Roblox, Affirm, and Poshmark. Our IPO probable picks for 2021 include a lot more companies across multiple verticals. The list is skewed more toward enterprise software companies (B2B) but that should not be surprising following the IPOs of a number of high-profile consumer facing companies (B2C).
Figure 1 below summarizes our top picks by sector, including companies that have already announced their IPO plans. The following Figure 2 provides a detailed description of all the companies, excluding the ones that have already announced their IPO plans.
SPACs on a Tear in 2020. But is the Pace Sustainable in 2021?
Special Purpose Acquisition Companies or SPACs have been on a tear. According to Goldman Sachs, there were 219 global SPAC IPOs as of December 18, 2020, raising a total of $73 billion, outpacing the $67 billion raised via IPOs, and considerably above the aggregate amount raised in 2019. Is 2021 set up for another banner year for SPACs? Very likely so, in terms of the number of new SPACs but less likely in terms of total De- SPAC transactions (the De-SPAC process is similar to that of a public company merger).
SPACs have become a viable third option for private companies to enter the public markets. They offer a few attractive features including shorter time to market, transparent and upfront pricing, handholding by highly experienced managers, aligned interests of sponsors and the target company, and downside protection for the investors.
Additional advantages include full transparency (S-4 filed at the time of acquisition, similar to S-1 with similar disclosure and risk outlines); forward-looking guidance (more information than an IPO as SPACs are public companies and are allowed to provide forward-looking guidance); and a low-cost investment opportunity with an easy exit for retail investors (investors can walk away with their funds if they don’t like the target selected by the sponsors).
Looking ahead to 2021, we expect the SPAC IPO pipeline to remain strong but expect De-SPAC deals to decline. This is supported by data from Goldman Sachs and PitchBook. According to Goldman, 193 SPACs (since Aug 2018) with $63 billion in equity capital are searching for a merger target. Of the 64 SPAC IPOs in last two years, 59% or 38 deals resulted in acquisitions. With over 3 times the total number of SPAC IPOs in 2020, the percentage of SPACs that can find suitable targets will likely decline in 2021 due to the 18 to 24 month time limit, and increased competition. Similarly, according to PitchBook, fewer than 30% of SPACs will be able to execute a merger deal for taking their target public in 2021.
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