IPOs and SPACs Come Full Circle as Liquidity Dries

The first-quarter earnings season was a mixed bag across the Financials sector. While the group reported the third-largest aggregate earnings surprise among the 11 sectors, Financials’ total earnings-per-share (EPS) growth change was –19.8%. Citigroup and Goldman Sachs reported strong profits and Bank of America’s Brian Moynihan was upbeat about the state of the consumer. Jamie Dimon at JPMorgan Chase was less sanguine, citing a myriad of challenges in the global macroeconomy.

Key Points:

• Capital markets are much softer versus a year ago, as the number of initial public offerings (IPOs) and special-purpose acquisition companies (SPACs) is down sharply
• Investors continue to grapple with a changing macro landscape while bankers struggle with higher costs of capital
• Traders must pay close attention to share lock-up period expiration dates as this market-moving corporate event can lead to volatility spikes

Bursting the Bubble

There’s no doubt that the capital markets are nothing like they were in early 2021. A year ago, IPOs and SPACs were all the rage. Look no further than at the performances of two once-popular exchange-traded funds (ETFs) tracking these spaces: The Defiance Next Gen SPAC Derived ETF (SPAK) and the Renaissance IPO ETF (IPO) have both plunged more than 50% from their February 2021 all-time highs.

Capital Markets: Hot to Cold

Low interest rates and a surge in the money supply helped foster a capital-raising crescendo. People had more cash on hand than they knew what to do with, so investors put it to use in promising (and many not-so-promising) ventures. It turned out to be throwing good money after bad, at least according to trends in the last 15 months. Last November as the Fed began to telegraph higher interest rates ahead, companies’ future cash flows were greatly discounted, and investors fled the IPO and SPAC spaces.

Plotting the IPO Boom

Wall Street Horizon tracks capital market data closely to help our customers stay on top of global market trends to manage risk. Our data underscores just how bubbly buyers were early last year. By our count, the IPO boom peaked around the end of the first half of 2021. Between Q2 and Q3 last year, there were more than 250 global IPOs. 2021’s fourth quarter and Q1 of this year featured under 200 in all. The current quarter’s sum is paltry compared to year-ago levels thus far.

SPAC Speculation

The number of SPACs hitting the tape is even more of a shocking trend. Coinciding with the top in ETF prices, the count of firms going public via SPAC was 251 in Q1 2021. The market cooled in the months thereafter. Even with a mini peak late last year, the current quarter tracks very lightly in terms of SPAC issuance.

Total SPACs for Q1 were off a whopping 57% year on year while the IPO count dropped just 13%. Nevertheless, SPACs remain much more popular than they were pre-pandemic. Moreover, we find that there are more SPACs than traditional IPOs so far in 2022.

Lock-Up Period Risk

A crucial corporate event involving new companies coming to the public markets is the share lock-up period expiration date. Stock prices are undoubtedly driven by changes in supply and demand, and when a supply of shares floods the market, volatility can arise quickly. Just look at what happened to Rivian (RIVN) a month ago. Following its May 8 lock-up expiration date, the stock cratered. Shares of the electric vehicle automaker hit a low under $20 that week. The stock then rallied after the selling pressure was alleviated.

Conclusion

What a difference a year makes. We see it in stock and bond prices and across capital markets. Investment bank profits will likely be pressured for the balance of the year amid the sharp decline in IPO and SPAC activity. As for traders and money managers, keeping close tabs on what’s happening in the primary market and with firms going public can help gauge risk appetite. There’s no doubt that a quickly shifting macro landscape is taking its toll on global markets.

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this blog post is not legal, tax, or 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.