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New Capital: How the Coronavirus Restructured the IPO Market

Source: RBC Quote

In the spring of 2020, the entire world found itself in a zone of turbulence, faced with a pandemic. Events developed very quickly: borders were closed, the everyday life of cities stopped.

And yet, the most pessimistic scenarios have so far been avoided. The rapid recovery of some macroeconomic indicators is primarily due to the fact that large international companies orientated themselves in the new reality, began to implement digital solutions rapidly, and switch to remote work. Consumers have also shown a high degree of flexibility — they have rearranged their behavior patterns and largely ensured economies' survival. Another positive factor was the adequate anti-crisis policy of regulators in most developed countries, primarily in the United States, where markets revived after the Federal Reserve's monetary policy's unprecedented easing.

Shock and Recovery

The result of this activity was immediately noticeable: after the collapse in mid-March, just two weeks later, the S&P500 and The Renaissance IPO Index rushed up. By the end of June, relative to the lowest point of decline, the IPO index had doubled, the S&P 500 — by almost 50%.

Of course, it cannot be said that the crisis was utterly extinguished with liquidity. The market experienced a shock, which led, among other things, to a revision of plans to go public. According to some estimates, two-thirds of American companies that announced their intention to list at the beginning of the year have canceled or postponed the placement. Globally, the number of IPOs dropped by almost 20%. However, the time lag between the anti-crisis measures and the recovery of business activity is a normal phenomenon, which we have observed in previous crises.

Now we see how this mechanism works in China. The country was the first to be affected by the pandemic, but it was also the first to begin to return to everyday life. The recovery in the Chinese economy, which started when the US pandemic was just flaring up, slowed down the global IPO market decline. The placements of Chinese companies, which took place in Hong Kong in January-June, provided half of the raised share capital.

New Favorites

The sectoral breakdown of recent IPOs is very indicative. The growth rate of attracted funding for pharmaceutical start-ups may turn out to be record-breaking in the entire history of public offerings in this sector. The funds that investors did not dare to invest in the business spheres that were hit by the crisis rushed to the industry most in-demand during the pandemic.

In the first half of the year, American and European biotech start-ups raised $10.1 billion due to 240 venture deals. Thus, 2020 has a chance to break the historical record of 2018 ($16.86 billion). So, Zentalis Pharmaceuticals, whose shares were worth $18 at the time of the placement, is now trading at $42. Another exciting event was the Chinese Legend Biotech Corp placement, which planned to raise $350 million. As a result, it received $424 million.

The record-holder was the American Royalty Pharma, whose business is estimated at a whopping $26.2 billion. Interestingly, according to the stated strategy, the company itself does not develop any medicines. Its business is to organize financing of pharmaceutical companies in terms of research and commercialization of developments. Thus, we see an interesting case for creating a platform at the intersection of pharma, consulting, and digital solutions. It is the largest IPO of 2020 so far.

Along with pharma, IT companies have shown impressive results. So, ZoomInfo (the use of artificial intelligence for the development of sales and communications with customers) in June raised $1 billion; its shares rose 60% on the first day of trading. As a result of the investments received, the company's assets are estimated at $15 billion. Instrutech Lemonade (digital insurance solutions) went public on July 2, with the share price doubling on the first trading day. Kingsoft Cloud, the third cloud services company in China, entered the US market in May and raised $510 million. Investors valued it at almost $7 billion.

Some mature, well-established companies considered the Spring of 2020 a good time for an IPO as well. For example, the music concern Warner Music Group Corp raised $1.8 billion. But here, too, the consequences of a change in the consumer model during the pandemic are evident. During the quarantine, listening to streaming music grew by 12%, which served as a good signal for investors.

An Imaginary Paradox

Thus, we see a paradoxical picture. On the one hand, in the second quarter, US GDP experienced a record 32.9% drop. On the other hand, 2020 may indeed be the year of record IPOs, as analysts predicted even before the pandemic. This paradox, of course, is apparent. The previously accumulated liquidity, which investors had planned to distribute before the crisis, as dictated by the results of 2019 and forecasts for 2020, was redistributed under the new realities.

The success of pharmaceutical and IT companies allowed investors not to reduce their appetite for investments, such as in 2009. As a result, we see not the destruction of the economy, as ten years ago, but its large-scale transformation.

By: Alexey Basov.

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