3 Questions Looming For The 2021 IPO Market

By Tom Zanki
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Law360 (January 3, 2021, 12:02 PM EST) -- Following an explosive finish for the initial public offerings market in 2020, capital markets lawyers are expecting that momentum to carry into the new year independent of the pandemic and changes in the presidential administration.

Regardless, 2020 will be a tough act to follow. Through mid-December, 427 operating and blank-check companies went public, raising $160.1 billion, Dealogic reports. That's more that double the prior year's proceeds of $62.5 billion, generated by 211 IPOs in all of 2019.

The year also ended with a bang. Home-rental giant Airbnb and food delivery app DoorDash went public at eye-popping valuations in December, raising more than $3 billion each.

Plus, rumors are circulating that there will be more big IPOs in 2021 from tech startups such as trading app Robinhood, grocery delivery firm Instacart, online job marketplace ZipRecruiter, online education company Coursera and website publisher Squarespace. Cryptocurrency exchange Coinbase has also filed confidential plans to go public.

These companies belong to an elite category of startups called "unicorns" — private startups valued at $1 billion or more — which found receptive public markets in 2020.

To what extent the momentum is sustainable can be hard to forecast. Rallies in the IPO market are often fragile, as unforeseen macroeconomic events can rattle investor confidence. But assuming no disturbances, IPO lawyers say they are witnessing a steady pace of new filings across industries that — at least in the near term — bode well for new issuances.

"The pipeline is full of companies in confidential submissions and otherwise," said Ropes & Gray LLP partner Craig Marcus, referring to the initial phase of an IPO filing, which is submitted confidentially to regulators. "There are a ton of deals looking to get out as we turn the page into 2021."

Here are three questions to consider as the year unfolds.

Which Companies Will Thrive Post-Pandemic?

Coronavirus vaccines are expected to be distributed in 2021, potentially bringing economic relief as the public health crisis eases. Yet the IPO pipeline has still favored issuers that fared well in the pandemic, such as remote software and e-commerce companies that function with less in-person contact. The arrival of effective vaccines may not reverse that dynamic.

The December 2020 IPO roster featured companies that did well amid social distance, including DoorDash and e-commerce platform Wish. Other such companies could go to market in January, including online gaming platform Roblox and fintech startup Affirm, which partners with home-exercise company Peloton.

More broadly, recent IPO activity is occurring against an economic backdrop where business travel remains down while videoconferencing and telecommuting appear set to endure. Deal makers expect that technology companies suited for that shift will lead the pack in 2021.

"The impact of the pandemic is going to continue to ripple through next year," Paul Hastings LLP partner Chris Austin said.

The health care industry is also closely intertwined with technology, and consumers are becoming more comfortable with telehealth visits and shopping for prescriptions online. Digital health company Amwell went public in September, following the path of competitor Livongo, which went public in 2019 and has since been acquired by Teladoc for $18.5 billion.

Prescription drug comparison platform GoodRx Holdings Inc. raised more than $1.1 billion in its September IPO, cashing in on the drive for greater health care efficiencies. GoodRx also operates HeyDoctor, an app that arranges doctor visits from an individual's home.

Davis Polk & Wardwell LLP partner Shane Tintle said he expects more health care companies that cater to populations rather than individuals will join the IPO wave. He noted the August debut of primary care startup Oak Street Health Inc., which uses analytics to serve Medicare patients.

"There's a good pipeline in the health care services space," Tintle said.

Which Companies Will Thrive in a New Administration?

Shifts toward renewable energy could gain steam under a Biden administration, which has made reducing dependence on fossil fuels a priority. Companies and investors that have anticipated this trend may stand to benefit.

New Mexico solar panel company Array Technologies Inc. raised $1 billion in an upsized October IPO, and more clean energy firms could go public through alternative means. At least two blank-check companies priced IPOs last autumn with the intent of acquiring renewable energy businesses and taking them public in the next 18 months or so.

ArcLight Clean Transition Corp. priced a $250 million IPO in September, followed by Spring Valley Acquisition Corp., which raised $200 million in December. Both ArcLight and Valley Acquisition are backed by private equity investors with energy expertise. 

Several makers of electrical vehicles and related batteries also went public in 2020 through blank-check companies.

Blank-check companies, also known as special purpose acquisition companies, or SPACs, raise money in order to acquire private businesses and take them public, typically targeting industries that reflect the strength of their management.

"You're certainly seeing a lot of SPACs with a focus on renewables and sustainability," said Ropes & Gray LLP partner Paul Tropp. "People think that's a sector ripe for opportunity."

Capital markets attorneys say more renewable energy companies could raise capital through traditional IPOs as well, and public policy shifts in favor of clean energy could provide a tailwind.

"There needs to be an incredible amount of investment in order to achieve goals with respect to the energy transition," Baker Botts LLP partner Mollie Duckworth said. "You're going to need to see a lot of capital flow into energy tech and energy transition-related companies."

Ropes & Gray attorneys added that it will be worth watching health care regulations under Biden, who may seek to bolster insurance coverage amid the pandemic, expand Medicaid or reduce prescription drug prices. Partner Michael Beauvais said companies that focus on these subsectors could see more interest from investors. 

Will the SPAC Attack Continue?

Perhaps the most notable change in 2020 capital markets was the explosion of SPACs. Historically, such offerings have generated a portion of IPOs, but in 2020 they accounted for most new issuances.

Pandemic-related uncertainty accelerated the boom in blank-check companies, which can enable target businesses to go public quicker and with more control over valuation. Companies targeted by SPACs negotiate deal terms directly with their acquirer, thus avoiding certain risks associated with a sometimes volatile IPO market.

Just how long blank-check mania will last is anyone's guess, but many capital markets attorneys say the growth of this alternative path to public markets could have staying power. One key will be to watch the results of recent SPAC acquisitions and how their shares fare post-merger. If investors see positive returns, that could sustain momentum for new blank-check issuances.

"The next 12 to 18 months will govern what [SPAC activity] will look like on a go-forward basis," said David Brown, EY's head of equity capital markets.

Prior returns have been mixed. While some notable businesses that went public through SPACs, like DraftKings and Virgin Galactic, have rallied, shares of most companies that took this route since 2015 have declined, according to research firm Renaissance Capital.

Tintle of Davis Polk noted that it is uncertain whether there are enough companies looking to be acquired by a SPAC that are public-ready, meaning prepared for the rigors of U.S. Securities and Exchange Commission regulations and being answerable to shareholders. If the supply of acquisition targets falls, the pace of new SPACs could recede from its current high.

"To continue at the rate it is going would require a significant amount of high-quality, public-ready companies electing to go the SPAC route," Tintle said. "I'm not sure confidence in that proposition is shared equally across the market." 

Signs that the blank-check may have peaked surfaced in October, when more companies began downsizing deal terms, indicating that investor demand was softening. But then SPACs surged again in December and continue to attract varied sponsors, many with proven records.

Private equity firm The Gores Group in December completed its sixth blank-check IPO, raising $300 million. At the start of 2021, SPACs appear to remain a sizable force in capital markets.

"We're aware of several high-profile sponsors that are looking to access the markets in the early part of 2021," Tropp said. "So there continues to be significant momentum heading into the new year with repeat issuers and also debut issuers."

--Editing by Alanna Weissman.

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