Continued Strong Third Quarter U.S. IPO Activity Pushes 2021 to New Highs

U.S. equity markets remained essentially flat in the third quarter (June 30 to September 30) and we saw this reflected in the number of initial public offerings (IPOs) on U.S. exchanges. According to FactSet data, 175 companies IPO’d on U.S. exchanges in the third quarter, little changed from the 176 IPOs in the previous quarter but still a high volume historically speaking.

Year to date (YTD), 2021 has already set new records. Through the third quarter, 785 companies have IPO'd on U.S. exchanges this year, well ahead of 2020’s 555 offerings for the full year. This year’s YTD volume is the highest number seen in FactSet’s annual data history going back to 1995; the previous high was 664 IPOs in 1996.

After dipping to a one-year low in the second quarter, IPOs by Special Purpose Acquisition Companies (SPACs) rebounded slightly in the third quarter. However, SPAC activity remains well below the peaks we saw in the last half of 2020 and the first quarter of 2021. What were the other U.S. IPO trends in the third quarter?

Q3 2021 IPO Activity Remains Flat at Still-High Levels

There were 175 IPOs in the third quarter, just below the 176 in the second quarter and a 18.6% decline from Q3 2020. Gross proceeds from IPOs for the quarter totaled $44 billion, down 15.1% from the previous quarter and down 42.9% compared to a year ago. There were 60 SPAC IPOs in the third quarter, up from 46 in the second quarter. SPAC IPOs raised $11.5 billion for the quarter, up 41.9% from the $8.1 billion in the prior quarter but down 73.3% compared to the $42.9 billion raised in the third quarter of 2020.

IPOs tended to be smaller in size in the third quarter; the average money raised for the quarter was $253 million, down from an average of $296 million in the previous quarter. Continuing the trend we have been seeing over the last year, IPOs in the $100-500 million range dominated; there were 112 IPOs in this size range, representing 64% of the quarter’s IPOs. Most of the quarter’s SPACs fell into this range (57 of 60).

There were six mega-IPOs in the quarter, down from 10 in the second quarter. This was the lowest number of quarterly mega-IPOs since the second quarter of 2020, which also saw six. The top 10 IPOs for the quarter raised $12.9 billion in total, down from $17.9 billion in the second quarter and the lowest top 10 total since the first quarter of 2020.

Ten Largest IPOs in 3Q 2021

Source: FactSet

The Finance Sector Continues to Lead IPO Volume Thanks to SPACs

Of the 175 initial public offerings in the second quarter, 72 were in the Finance sector led by the 60 SPAC IPOs. So far in 2021, SPACs have accounted for 418 of the 452 IPOs in the Finance sector. The Finance sector led all sectors in terms of total money raised in the third quarter ($14.9 billion), but it was closely followed by Technology Services with $12.9 billion.

IPOs by Sector (ranked by 3Q 2021 volume)

*Excludes all direct listings

Source: FactSet

Activity by Financial Sponsors Slipped in Q3 but 2021 Looks Strong

After showing a strong rebound in the second quarter, financial-sponsor-backed IPOs fell slightly in the third quarter. There were 35 venture-capital-backed IPOs in the third quarter, a 22% decrease from the previous quarter. There were nine private equity-backed IPOs in Q3 2021, down 25% from the prior quarter. Gross proceeds for VC-backed offerings totaled $10.6 billion, while PE-backed IPOs raised $2.0 billion for the quarter. At this pace, IPOs backed by VC and PE funding have already raised the most money since 2014 and the volume of offerings for all of 2021 is poised to set a seven-year high, as well.

Direct Listings Accelerate

Some in the industry have expected to see a jump in the number of companies opting for direct stock listings to bypass the traditional IPO route via Wall Street underwriters. While direct listings have increased in the last couple of years, the numbers have not been overwhelming. We have seen six companies go public via direct listings this year, but relative to the surge in total IPOs, the volume is not notable. For comparison, if direct listings are included in the total number of IPOs, in 2021 they represented 0.8% of total IPOs compared to 0.5% in 2020. Grocery delivery company Instacart is one more company that is considering going public via a direct listing in 2021.

Direct Listings

Source: FactSet

Factors Impacting IPO Activity for the Rest of 2021 and 2022

Looking ahead, one interesting sector to consider is Energy Minerals. As shown in the chart below, when West Texas Intermediate (WTI) crude oil was trading in the $90-100 range in 2011-2014, IPO activity was strong for companies in the Energy Minerals sector. However, the collapse in oil prices in late 2014 ushered in a stretch of lower oil prices and a period during which very few energy companies went public. The COVID-19 pandemic dealt the industry an even bigger blow, with oil prices falling sharply in April 2020 and futures briefly dipping into negative territory as oil traders struggled to find buyers. As a result, over 100 oil and gas companies went bankrupt in 2020. Oil prices have risen sharply since the spring of 2020, with WTI futures currently trading above $83/bbl. Futures markets are indicating a gradual easing of oil prices over the next year and a half but prices remain dependent on various economic and geopolitical factors.

Looking ahead at future IPOs, 294 companies have released initial preliminary filings in 2021 and are still in registration (this excludes offerings that are postponed or withdrawn). All but five of these are SPACs. Given the growing regulatory and legal challenges facing SPACs, it will be interesting to see what happens to these companies hoping to go public. As I have previously highlighted, we’re seeing the impact of increased regulatory scrutiny of SPACS by the Securities and Exchange Commission (SEC) as well as lawsuits filed against SPACs by shareholders. All of this has had an obvious dampening effect on the number of SPAC IPOs over the last two quarters.

With the third quarter earnings season in full swing and companies reporting strong results, U.S. equity markets are trading at all-time highs. However, previous optimism around the government-stimulus-fueled economic recovery has given way to concerns about rising inflation and supply chain bottlenecks. Challenges for retail and consumer goods and services firms going into the all-important end-of-year holiday season could dampen market enthusiasm and dissuade companies in these industries from going public.

Note: All statistics are based on FactSet data for IPOs priced during the specified period for companies going public on exchanges in the United States. Note that data for previous quarters/years has been revised based on updated information, so values cited here may not match previous publications.

The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.