U.S. IPO Market: SPACs Continue to Dominate in the First Quarter of 2021

In 2020 we saw a surge in initial public offerings (IPOs) on U.S. exchanges, fueled by a boom in offerings from Special Purpose Acquisition Companies (SPACs), sometimes called blank check companies. SPACs are companies that are created with the express purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or similar business combination with one or more businesses. So far in 2021, we’re seeing a continuation of this trend. Last year SPACs accounted for 55.7% of all IPOs; in the first quarter, SPACs represented 68.5%.

Record First Quarter Activity

According to FactSet data, U.S. exchanges saw a whopping 365 IPOs in the first quarter, a 66.7% increase over the fourth quarter of 2020 and a 677% jump compared to a year ago. In aggregate, IPOs raised $128.9 billion in the first quarter, up 84.3% compared to the fourth quarter and up 790% compared to the first quarter of 2020. The dramatic year-ago comparisons are not surprising considering that fears about the growing COVID-19 coronavirus pandemic hit equity markets in mid-February last year, essentially putting a halt to all IPO activity.

While the rush in IPO activity in the first quarter led to a proportionate increase in the number of mega-IPOs (17, representing 4.7% of all IPOs), the dominance of SPACs has led to a surge in the share of IPOs raising $100-500 million. Of the quarter’s 250 SPAC IPOs, 217 (86.8%) fell into this medium range while just 28 (11.2%) raised $500 million or more. The average amount of money raised by SPACs was $327 million, compared to an overall average size of $353 million for all IPOs. Note that all 250 SPAC IPOs were priced at $10 per share.

The top ten IPOs for the quarter raised a staggering $23.3 billion. This was the biggest quarterly number for the top 10 IPOs since the third quarter of 2014, when Alibaba debuted with gross proceeds of $25 billion. The list included companies across a range of sectors, although technology (Electronic Technology, Health Technology, and Technology Services) accounted for six of the top 10.

Ten Largest IPOs in 1Q 2021 (ranked by gross proceeds)

Source: FactSet

Finance Sector Dominates Due to SPACs

Of the 365 initial public offerings in the first quarter, 259 were in the Finance sector, dominated by the 250 SPAC IPOs. Running a distance second was the Health Technology sector with 37 IPOs and Technology Services with 23. Not surprisingly, the Finance sector led all sectors in terms of gross proceeds ($83.7 billion), followed by Technology Services with $13.4 billion raised.

IPOs by Sector (ranked by 1Q 2021 volume) *

Source: FactSet

*Excludes direct listings

Activity by Financial Sponsors

There were 23 venture-capital-backed (VC) IPOs in the first quarter, the lowest quarterly number since Q2 2020. There were just four private equity-backed (PE) IPOs in Q1 2021. Gross proceeds for VC-backed offerings totaled $7.3 billion, significantly less than the $17.3 billion raised in Q4 2020; PE-backed IPOs raised just $1.36 billion. As SPACs have dominated the IPO market in recent quarters, the role of PE/VC financing has diminished substantially. Over the last 10 years, PE- and VC-backed IPOs together accounted for an average of 49% of IPO activity per quarter, both in terms of volume and value. However, in the first quarter of 2021, PE/VC represented just 7.4% of IPO volume and 6.7% of total gross proceeds.

Potential Regulatory Changes for SPACs

Over the last three quarters, we’ve seen over 500 SPACs go public on U.S. exchanges. SPACs have existed for some time and there doesn’t seem to be any one explanation for the sudden surge in 2020. Certainly U.S. accounting rules have provided numerous benefits to SPACs that have made them a popular vehicle for taking a company public. But the Securities and Exchange Commission (SEC) may be tightening the reins. On April 12, 2021, the SEC issued accounting guidance for SPACs that would classify SPAC warrants as liabilities instead of equity instruments. Warrants are meant as an added incentive to invest in the SPAC, giving investors the right to buy a share of the stock in the future at a specified price. Trading of warrants is similar to options, and while carrying more risk than common shares, they can provide better returns. If this change is enacted, SPACs would be required to refile their past financial statements to change the accounting of their warrants.

Because SPACs are required to find a business combination with a specified time period, usually two years, we can expect to see a flurry of potential merger activity this year. FactSet data shows that there were 105 announced SPAC mergers in 2020; for 2021 year-to-date through April, we saw 112 merger announcements.

Looking Ahead

Looking ahead at future IPOs, there are just 10 companies that released initial preliminary filings in 2020 and are still in registration (this excludes offerings that have been postponed or withdrawn). This small number of outstanding IPOs reflects the aggressive pace of IPO activity last year. So far in 2021, 263 companies have released their initial preliminary filings; an astounding 255 of these are SPACs. Given the SEC changes highlighted above, it will be interesting to see what happens with these companies.

As for what will drive initial public offerings in 2021, IPOs tend to follow the trends of the broader market. Last year, outside of the SPACs, we saw surges in Health Technology and Technology Services IPOs, which intuitively makes sense given the pandemic lockdowns and global health crisis. Another sector that was heavily impacted by the events of 2020 was retail. The pandemic accelerated the ongoing digital transformation in the retail industry; going forward, internet retail will be key and traditional retailers will need to have a strong internet presence to survive. Interestingly, we saw six retail IPOs in the first quarter, all internet focused. While consumers’ spending patterns shifted dramatically last year, it remains to be seen how much of that shift is permanent.

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.