At the onset of the pandemic in early 2020, IPO activity came to a screeching halt. Companies postponed planned offerings, while investor appetite for new issuances declined sharply amidst wider market volatility and uncertainty.
However, after an initial adjustment period, IPOs came roaring back – 2020 ended up marking one of the busiest IPO years on record in the US and globally.
Companies adapted their IPO plans and proceedings to cater to remote working and virtual roadshows. Investor risk appetite also recovered swiftly thanks to central bank stimulus and recovering economic outlooks. Moreover, the IPO surge was fueled by a swathe of new listings from healthcare, technology, and other pandemic-resilient sectors. Record-low interest rates also drove more risk-seeking behavior from investors.
The Post-Pandemic Era Will See Lasting Changes in Primary Market Dynamics
Looking ahead, primary markets will continue exhibiting pandemic-induced adaptations even as conditions normalize. Remote roadshows and book-building are likely to persist as convenient options. And healthcare, biotech, tech, and other pandemic winners are well-placed to continue dominating new issuances.
However, concerns around lofty private valuations leading to post-IPO stock underperformance could dampen investor enthusiasm, especially for tech listings. Moreover, if inflation and interest rates rise as expected, risk appetite would moderate. The likelihood of further COVID waves also linger as a risk factor.
ICMA mentioned that increased volatility around major events like the US elections and geopolitical tensions could also impact IPO investor sentiment. And the surge in SPACs (special purpose acquisition companies) during the pandemic will have disrupted the competitive dynamics for IPOs – more established companies may now choose the SPAC route.
Overhauls in Listing Requirements and Guidelines Are Likely
Regulators globally are also contemplating overhauls after observing pandemic disruption dynamics. Issues around providing firm guidance amid uncertainties, virtual due diligence, and after-market trading volatility are likely areas of reform focus. Overall, companies will have to provide more realistic projections, pricing, and lock-up commitments when going public.
Strong Aftermarket Performance Supported Investor Appetite
Beyond the recovered issuance volumes, the resilience of primary markets owes much to the stellar aftermarket performance of 2020 IPO vintages, suggesting strong investor appetite for post-pandemic era growth stories. Many pandemic-era IPO stocks delivered outsized returns driven by factors like digital acceleration and healthcare innovation.
Moreover, the unprecedented policy response from governments and central banks has hastened the economic rebound. Markets are buoyed by the prospects of a robust post-pandemic recovery, lending momentum to primary market rebounds. The latest IPO vintages are also outperforming amidst the global recovery trade.
However, there are also risks associated with the sheer pace of central bank balance sheet expansion and asset purchases, which could stoke excessive risk appetite and an IPO bubble. As monetary policies start normalizing, investors would become warier of speculative listings and unprofitable issuers.
Heightened Volatility and Uncertainty Could Moderate IPO Activity
While the global recovery underway has boosted risk appetite in primary markets, several factors could strain momentum or moderate IPO activity going forward. The surge in IPOs and risk asset prices has heightened concerns if the exuberance is excessive, given lingering uncertainties in the post-pandemic macro environment.
Inflation has already seen a sharp rise across major economies, forcing central banks to accelerate rate rise plans which would increase the investment risk profile. Markets expect a period of stagflation which would lower company earnings and dampen valuations – not constructive dynamics for IPOs.
Similarly, while the economic rebound so far has been healthy, the outlook has markedly deteriorated on macro headwinds like China’s slowdown, high inflation, the energy crisis in Europe, and supply chain constraints. Any of these factors contributing to a global recession by 2023 would starve primary markets of investor appetite.
Geopolitical tensions have also soared recently over flashpoints like Russia-Ukraine and China-Taiwan. If these materialize into armed conflict or economic warfare through sanctions, market volatility would spike, and risk-off moves could roil IPO dynamics.
Even barring these extremes, volatility around political events like the 2024 U.S. presidential election could unsettle markets enough to impact IPO activity and fundraising conditions. Overall issuance volumes could moderate as investors turn more discerning.
The SPAC Bubble Burst Could Also Negatively Overspill into IPOs
The frenzied boom and subsequent plunge in blank-check companies could also negatively impact the IPO ecosystem. SPACs or special purpose acquisition vehicles had attracted immense retail and institutional interest during pandemic-era markets, emerging as an alternative to conventional IPOs for new listings.
However, poor post-merger share price performance of SPACs has already led to massive value destruction and loss of investor confidence. In 2022, SPAC IPO volumes are set to decline 95% from 2021 levels after the bursting of the SPAC bubble. Oversupply, weaker institutional support, and waning retail interest are factors behind the SPAC downturn.
But the sheer scale and momentum of the SPAC cycle means there could still be negative overspills into primary markets more widely. Markets are already on edge about whether collapsed SPACs could fuel contagion risks or systematic instability given.
Moreover, the exuberance, value destruction and allegations of frothiness could erode investor trust in new issuances overall – both SPACs and conventional IPOs. This could moderately dampen risk appetite and tighten regulations around disclosure, reporting standards and other listing norms for all public debut vehicles including IPOs.
Adapting to Accelerated Digitization and Shifting Policies
Overall, primary markets have shown remarkable resilience despite the disruptions and uncertainty caused by COVID-19. However, issuers and investors alike will have to continually adapt to pandemic-accelerated trends around digitization, policy shifts, and sectoral transformations when participating in future IPOs and issuances.
Valuations and risk assessments will have to factor in the prospects of an eventual post-pandemic normal. But the innovation and growth opportunities spawned by the pandemic-era disruptions provide a conducive backdrop for primary markets in the post-COVID world.
