2021 Global Equity Capital Markets Outlook
In a conversation with David Getzler, head of Equity Capital Markets for Societe Generale Americas, he points to the key dynamics that impacted the equity capital markets in 2020, and what we can expect in 2021.
Before we discuss the new issue markets, it would be interesting to get your perspectives on secondary equity markets. Clearly 2020 was such a roller-coaster for equities.
Indeed, 2020 broke a lot of the norms in terms of what to expect when a dramatic ‘black swan’ event such as the COVID virus hits. Stepping back, what was impressive was the speed with which global equity markets bounced back from the COVID-shock and the associated contraction of the global economy. GDP in the OECD area countries shrunk 9.8% in Q2 2020. The quick and forceful reaction by central banks, led by the Federal Reserve, and by governments around the world was critical to provide equity investors with confidence that the recession would have a short duration and would be followed by a significant bounce-back and recovery of the global economy.
If we look at the year ahead, I think it’s instructive to understand recent equity flows and allocation strategies; led by the big global investment funds. In there was a big shift in allocation from Growth-oriented stocks to Cyclicals as can be seen in the table below. This shift reflected the consensus view that the economic recovery is on track, benefiting from the ongoing massive monetary and fiscal support from the U.S. and other major economies, and that the vaccine will be a ‘game-changer’ to arrest the spread of the virus.
As we look out at 2021, the overall picture remains constructive for equities, recently reinforced by very solid Q4 earnings results. At the same time, feedback from investors is that within this generally positive picture, there will be swings as news of the virus and vaccine comes out, and as investors look to Washington for decisions on a stimulus and other government programs.
Now turning our attention to the equity capital markets, what would you say are some longer-lasting trends that emerged with COVID?
Three emerging trends that we discussed in June last year are going to become part of the ongoing ECM landscape. Firstly, the embracing by all involved parties – investors, issuers and their banks – of the video-conference format for roadshows. Secondly, an understanding by investors and the corporate sector that the ‘remote-work-from-home’ economy will, to a significant degree, become incorporated into how society functions. Thus, investors will continue to look for those companies best positioned for this trend. DocuSign, which is up 160% since March 2020 and now has a market cap of $44 billion is a poster-child for these dynamics. But don’t forget companies such as UPS and Fedex, up 90% and 165% respectively since March, as they will be delivering a lot of the products being purchased online. Thirdly, I expect convertible issuance to continue to prove attractive for issuers as they monetize higher volatility in their stock price. It definitely looks like global market and stock volatility will continue for the foreseeable future due to the potential for political upheavals and pandemic-related issues.
Another trend that appeared post-COVID, and I would expect to continue, were transactions being structured as a combination of equity and convertibles. The number of such transactions doubled in 2020 over 2019. Such multi-tranche offerings enable companies to maximize ‘equity’ capital they raise and also provide flexibility to adjust the size of each tranche in response to investor demand. Our conversations with clients on capital structure now invariably cover the spectrum of debt, equity-linked and equity.
Now as we enter 2021, what should we looking out for on the ECM front?
If the first weeks of January are any indication, 2021 could well be a banner year on the ECM front. We will discuss special-purpose acquisition companies, or SPACs, later, but after averaging 21 deals a month in 2020, a record 91 SPACs listed in January, and the pipeline continues to build. Then you have many IPOs from 2020, whose stocks have traded up sharply, and these are all prime candidates for secondary offerings this year.
Stepping back, it is important to remember that ECM markets first key-off secondary markets; and there, the backdrop of a strong economic recovery is encouraging. SG is forecasting global GDP to grow by 5.0% in 2021, after a 3.9% drop in 2020.
Then, I would point to a simple maxim; ‘success begets success’. Fund managers work very hard to be among the best-performers in their category; and they all made a lot of money by investing in new issues last year. While IPO after-market trading ‘pops’ tend to get all the attention – and there the class of 2020 IPOs traded up 76.3%% on average to year-end - convertibles also provided great returns to investors. The benchmark Bloomberg US Convertibles Index was up 50.6% in 2020. So, you are going to have fund managers who are going to be aggressively looking to invest in new issues this year, which only helps fuel demand for ECM transactions. On the issuer front, quite a number of companies are hitting all-time high stock prices, and are going to consider raising equity for expansion or for acquisitions.
What are some of the interesting IPOs we should expect to see this year?
Well it’s going to be hard to beat 2020, with Airbnb, Doordash and Palantir all listing. The most notable IPOs to look out for include online payments solution provide Stripe, grocery delivery platform Instacart, no-fee stock trading platform Robinhood, crypto-currency exchange Coinbase, and the next plant-based meat products company Impossible Foods. Interestingly, the largest IPO this year could well be from India. Flipkart, which is India’s largest online retailer and owned by Walmart is considering a U.S. listing for its IPO; where speculation is for a $10 billion transaction. While high-profile technology IPOs get most of the attention, the largest number of IPO issues are expected from the healthcare-biotech sector; with investors seeking out those biotech companies with novel drug candidates and development platforms. Excluding SPACs, healthcare accounted for 50% by number of all IPOs and 32% by $ raised in 2020; compared to 23% and 36%, respectively for Technology. After these two sectors, we anticipate an interesting number of IPOs from the Consumer and Financials sectors.
Can you help us understand the SPAC phenomena which has clearly over-shadowed direct listings as an alternative to the traditional marketed IPO?
SPACs, otherwise known as blank-check companies are listed vehicles used to acquire privately held companies and thereby take them public. Well, the SPAC market exploded in 2020 and, as we discussed earlier, is showing no sign at all of slowing down in 2021. I thought it would be constructive to provide some context on what is motivating the SPAC-stakeholders. When companies evaluate an M&A sale or an IPO of the whole company or a division, the SPAC exit has now become a great alternative (sale process known as ‘de-SPACing’). As the SPAC is already public, it is a much faster process than an IPO for a company to become listed; and the management teams brought in usually have significantly more freedom in running the companies than when controlled by private equity firms. Electric auto companies, such as Canoo, Hyliion, Fisker, and Nikola, have been popular targets for SPACs.
Sponsors of SPACs are typically a combination of experienced industry executives and well-known private equity investors; case in point Bill Ackman of Pershing Square, who raised the largest SPAC to date of $4.0 billion. The sponsors of SPACs will typically get 20% ownership (“Founder Shares”) of the SPAC basically for free ($25,000); which then translates into a significant stake in the company that the SPAC acquires; so providing private-equity like returns and being able to raise public equity at a much lower cost of capital to finance their investment.
I feel like it’s important to note that Bill Ackman’s SPAC actually didn’t include that 20% ownership stake for $25,000 which is how he was able to raise such a large SPAC. It will be interesting to see if more SPACs start doing away with Founder Shares but for now the vast majority continue to have this feature, which is one of the main reasons why its so appealing to raise a SPAC.
On the investor side, they have the ability to get their money back in two years if the SPAC does not consummate an acquisition by then and, importantly, they can also get their money back if they don’t approve of the company that the SPAC is purchasing. So basically, they have a lot of downside protection and then have an option to participate in the returns once the SPAC makes an acquisition. Key to maintaining investor appetite will be the performance of SPACs once they have made an acquisition. 2020 was a good year on this front, with the SPACs that made acquisitions gaining an average of 64% by year-end. So, looks like the party will continue for some time at least!
Another important trend we hear a lot about is the growing importance of ESG. How do you envisage that impacting new issue markets?
If I look at the impact of ESG investing from a year ago, I can only say that is has become an even more important factor today. The COVID virus has reinforced the need for companies to have in place contingency plans to deal with major disasters. This includes a whole range of issues such as secure supply chains, sufficient data-transmission capacity, and alternate office facilities. This is all in addition to the importance that companies and investors are placing on fundamental topics such as sustainable business practices, work-place diversity, and being an overall ‘good corporate citizen’.
I can tell you first-hand that ESG considerations and strategies are now consistently included in discussions and meetings that our Bank has with the Finance and Treasury teams at our corporate clients. One of our busiest and most sought-after partners is our recently appointed Chief Sustainability Officer, Karl Pettersen. Our Bank has increased its commitment to being at the forefront of this global trend towards incorporating ESG in all corporate decisions. Then, when we talk to investors they are all looking to make investments in companies and projects that have an ESG-orientation and commitment.
Now, if we switch our attention to markets outside the U.S.? What do you expect from the European ECM markets?
There is a lot of optimism among investors we talk to about the outlook for European equities based on expectations for the EU’s GDP to grow at a faster rate this year than the U.S. economy, coupled with the valuation discount on European equities.
On the ECM front, there is a large IPO pipeline building in Europe. There is an expanding tech-focused investor base in Europe and quite a number of large tech and e-commerce IPOs are going to list in Europe and not come to the U.S. Additionally, the larger U.S. accounts are attracted to European deals by the valuation discount to comparable U.S. peers. The first two $1B+ IPOs from Europe, which priced end-January, generated very strong investor demand and both traded up robustly in the aftermarket. These IPOs were from InPost, which is a leader in e-commerce logistics in Poland and expanding across Europe and listed in Amsterdam, and iconic UK footwear maker Dr Martens.
Notable deals coming in the next weeks include AUTO1, which is Europe’s largest online marketplace for used cars and will list in Frankfurt, and UK online greeting company Moonpig.
Moving to another big market, China, what can we look for from that market?
Well, if you followed all the U.S.-China political rhetoric, you would be surprised to hear that 2020 was the busiest year for Chinese IPOs in the U.S. since 2014 (when dominated by Alibaba’s IPO), with $11.7 billion raised last year. So we should expect to see Chinese companies continuing to evaluate the U.S. for their primary listing; especially those companies in the technology sector. The abrupt cancellation last year by Chinese authorities of the $25-30 billion IPO for Jack Ma’s Ant Group, China’s leading fintech company, reinforced the importance of a consistent regulatory framework which the U.S. SEC provides.
Any last thoughts on 2021?
While the outlook is positive, events can shift quickly. So I continue to advise companies that if equity capital is critical to expanding your business organically or through M&A, then position yourself to be able to move quickly to access what are currently very receptive capital markets.
Unless otherwise stated, any views or opinions expressed herein are solely those of David Getzler and may differ from the views and opinions of others at, or other departments or divisions of, Societe Generale (“SG”) and its affiliates. No part of David Getzler’s compensation was, is or will be related, directly or indirectly to the specific views expressed herein. This material is provided for information purposes only and is not intended as a recommendation or an offer or solicitation for the purchase or sale of any security or financial instrument. The information contained herein has been obtained from, and is based upon, sources believed to be reliable, but SG and its affiliates make no representation as to its accuracy and completeness. The views and opinions contained herein are those of the author of this material as of the date of this material and are subject to change without notice. Neither David Getzler nor SG has any obligation to update, modify or otherwise notify the recipient in the event any information contained herein, including any opinion or view, changes or becomes inaccurate. To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information contained herein.
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