With the presidential election looming and uncertainty growing about what will happen to the stock market and economy after that, private companies are racing to make their debuts on Wall Street.
The sizzling initial public offerings of cloud companies Snowflake and JFrog this week, as well as Friday’s debut of gaming tools developer Unity Software, illustrate the strong demand for new stocks.
Experts say the Federal Reserve’s decision to keep interest rates at zero for the foreseeable future has helped fuel demand for IPOs while boosting the overall stock market and high growth techs in particular.
“IPOs are doing well and I guess that’s what happens when you have the Fed pumping money into the financial system,” said Troy Hooper, head of IPO content at Mergermarket. “The money has to go somewhere.”
More companies are choosing to list on Wall Street through mergers with so-called blank check special purpose acquisition companies. Electric vehicle makers Lordstown Motors and Hyliion are planning to go public via mergers with SPACs.
DraftKings and Richard Branson’s Virgin Galactic (SPCE) went public through SPAC deals. Branson now wants to raise more money by launching a SPAC of his own to buy more businesses.
Reuters reported Friday that Playboy, which went private in 2011, is considering a return to Wall Street via a merger wth a SPAC. And even some non-Wall Streeters — such as former House Speaker Paul Ryan and baseball executive Billy Beane of “Moneyball” fame — are backing SPACs.
Window for IPOs could soon shut
There is a growing sense that big unicorn startups will try to go public in the next few weeks to get their stocks trading before the election — especially after the strong debut for Snowflake, which more than doubled on its first day.
Big Data firm Palantir will go public on the New York Stock Exchange on September 29. Drug price comparison company GoodRx and collaboration software developer Asana are also expected to begin trading before the end of the month.
Palantir is planning to list existing shares directly to the NYSE, a move that allows it to bypass a lengthy Wall Street roadshow — the series of meetings with prospective investors. It also means it won’t have to issue new stock. Spotify (SPOT) and Slack (WORK)went public this way.
The Securities and Exchange Commission is also weighing whether to approve a new rule that will allow companies to also raise new money by directly listing their stocks. More companies could go public via direct listings if they are allowed to list shares and generate cash at the same time.
“It will be interesting to see what happens with Palantir and Asana. There is increased interest from wealth managers in tech unicorns after Snowflake,” said Phil Haslett, co founder and chief revenue officer with EquityZen, a company that lets investors buy pre-IPO shares of private companies.
Also waiting in the wings to possibly go public in 2020: Airbnb — which Haslett dubbed the “elephant in the room” — and DoorDash. Jack Ma’s Ant Group, the financial arm of Chinese e-commerce leader Alibaba (BABA), is looking to go public in Hong Kong and Shanghai before year end, too.
“The window to go public will probably close by mid to late October. Listings may stop after that,” Haslett said. “There are a lot of risks for companies waiting to go public next year. There is still dry powder to raise money in the private market but the valuations may be lower.”
Blank check deals will continue to be popular, particularly because they don’t take as long to complete as an IPO or direct listing.
There already have been nearly 100 SPAC deals so far in 2020 that have raised a total of$35 billion, according to Evan Ratner, managing director and portfolio manager of SPAC strategies at Levin Easterly Partners. That’s up from just 59 SPAC transactionsraising $13 billion for all of last year.
“With a SPAC, a private company can go one-to-one to another company looking to take it public,” Ratner said. “It’s all about credibility and maximizing value. If you are a company with real funding needs and have a good brand, a SPAC could make sense.”
Now or never?
Companies that are planning public offerings seem to recognize this as well. And there’s a newfound sense of urgency.
Thomas Healy, CEO of Hyliion, said his company, which makes commercial electric trucks, considered staying private. But ultimately, he felt now is the time to go public.
“What excited us was the ability to bring in more money. That will help us grow the company,” Healy said.
Hyliion is merging with a blank check firm named Tortoise Acquisition Corp (SHLL). and raising $560 million from what’s known as private investment in public equity, or PIPE. Shareholders will vote on the deal on September 28. If approved, the ticker will change to HLYN.
But the traditional IPO isn’t dead. Startups want the legitimacy that goes along with being a publicly traded company that’s been vetted by top investment banks.
“This is a proud moment. We have just turned the corner to make tele-health kosher,” said Roy Schoenberg, co-CEO and president of Amwell, a virtual health company that competes with Teladoc. Amwell went public on Thursday and its shares rose nearly 30%.
Still, some worry that the big pops for newly public companies are reminiscent of the dot-com bubble of 20 years ago. Even though the crop of unicorns going public today are higher quality than the likes of Pets.com, which went public in February 2000 and folded nine months later, the debut prices for many new stocks are just too rich.
“We’re definitely seeing animal spirits running rampant. The valuations don’t make sense,” said Max Gokhman, capital markets strategist at Pacific Global Asset Management. “Snowflake is a solid business. But if their wings are made of snow, they are going to melt by flying to close to the sun.”
