IPOs are leading the stock market's recovery. The Renaissance IPO Index has soared 42.6% from its mid-March low, compared to a 28.9% rebound for the S&P 500. The IPO Index, which is composed of the largest and most liquid IPOs over the past two years and tracked by the IPO ETF (NYSE: IPO), closed Monday roughly flat year-to-date (-0.6%), versus the S&P's loss of 10.4%.
IPOs and the coronavirus economy
IPOs are often pitched on secular growth trends, and some of the largest listings of the past two years have been especially well-positioned for the coronavirus economy, such as cloud-based productivity tools Zoom Video (ZM), Smartsheet (SMAR) and Slack, (WORK), web security providers CrowdStrike (CRWD) and Cloudflare (NET), e-signature platform DocuSign (DOCU), online pet supplies seller Chewy (CHWY), and COVID-19 vaccine developer Moderna (MRNA).
2020 IPOs have been trending positive as well. As of Monday's close, the year's offerings averaged a 12% return from offer, entirely driven by the healthcare sector. Biotechs are largely unaffected by COVID-19, and may benefit from an increased emphasis on advancements in life science. April's three IPOs so far, all biotechs, priced above the midpoint and average a 76% return.
Lower volatility, more follow-ons, and new filings set the stage for a May pick-up
Following the slowest March and April since the financial crisis, there are signs that the IPO market will begin opening in May. In addition to the IPO rally, volatility has settled, with the VIX closing Monday below 35 for the first time since March 4. IPO activity is typically hampered when the VIX is above 20-25, and virtually nonexistent above 40.
ECM desks have seen increased follow-on equity offerings and convertible note offerings, which begin happening ahead of a pick-up in IPO activity. Farfetch (FTCH), Snap (SNAP), Health Catalyst (HCAT), and Grocery Outlet (GO) have all sought capital in recent weeks.
Last, more companies have begun submitting initial filings, indicating potential May IPOs. After more than a month without a $100+ million IPO filing, Kingsoft Cloud (KC) filed in mid-April, followed by ADC Therapeutics (ADCT) and Ebang International (EBON).
What's next
COVID-19's impact on the US economy is still unknown, which will continue even after earnings season reveals the initial fallout. However, the IPO market has currently stabilized, and activity should soon expand beyond pre-bought biotechs as the window opens to a variety of companies with a COVID angle. Grocery giant Albertsons (ACI) could be one of the first movers following its quarterly earnings call this week, and provide a test case for new virtual IPO roadshows in the US. 2020's anticipated mega-listing Airbnb has been put on hold indefinitely, but with hundreds of private unicorns, there is a large backlog of "new economy" companies readying IPOs, including cloud services provider Rackspace, restaurant delivery platform DoorDash, and cloud-based project management platform Asana.
