Tuesday, May 24, 2022
Bringing the Latest in News Straight to Your Screen


Contradictory Signals Emerge From The IPO Surge

By News Creatives Authors , in Leadership , at October 4, 2021

Though Beijing has cut off the flow of new listings from Chinese firms to American exchanges, there is no shortage of initial public offerings (IPOs). This powerful march to market signals two seemingly contradictory things. On the one hand, it speaks to business optimism, about the economy and future profits. On the other hand, it likely also signals a belief among managements that stocks today are pricey enough to give listing companies more for their shares than an internal assessment might put their worth. Certainly, firms would not readily list if they thought the reverse were true.

It is remarkable in many ways that after the economic harm caused by the Covid lockdowns and quarantines, how many IPOs are coming to market this year. In the eight months through August, almost 280 companies have listed this way. If this pace keeps up during the remaining months of the year, some 420 IPOs will have taken place in 2021, almost twice last year’s number. And barring some major economic or market setback, it looks as though the pace will hold during the remaining months of the year. An informal count among financial people reveals at least 100 companies that have either announced their intention to float an IPO or have indicated an interest. And none of these figures include the SPAC IPOs, which, according to an accounting done by SPAC Research, amount to some 473 so far this year, already some 70% higher than all of 2020. 

In one important respect, all this activity is a positive judgement on the future.  Managements raise money in this way because they think the funds can be well deployed in a future, profitable expansion. They certainly do not raise capital on such a grand scale to let it sit idle, especially with inflation now eroding the real value of money at better than 7% a year. And with interest rates and bond yields as low as they are, nor are managements likely to raise equity capital to put it into accounts or store it in fixed-income investments. The only reason managements would go through the time and expense to raise this capital is because they see it financing that profitable expansion in their company’s business. Each firm, of course, makes its own decisions about its particular products  in its own market niche, but taken across all this IPO activity, the outpouring suggests the kind of general confidence that brings real investment and drives the overall level of economic activity upward.

On a less positive note, is the valuation question. If the listing decision reflects a long-term assessment of opportunities for deploying the equity capital, the IPO’s timing can reflect an assessment of market valuations. If management determines that market levels are high, higher perhaps than fundamental assessments of the company’s value, they will see an opportunity to raise more capital than they otherwise could and so rush the IPO.  If enough companies make the same assessments, they will crowd a year with IPOs, as 2021 is. It is only a judgement, of course, but this year’s outpouring does show an implicit vote by diverse managements that stock prices might have risen above levels that a hard-headed assessment of reality could support.  These judgements may have missed some considerations. It could be that the relative valuations only apply to the lisitng companies and perhaps those in similar lines of business. Perhaps those taking the view that market valuations are high have failed to consider certain macro considerations, for instance the commitment by the Federal Reserve (Fed) to continue pouring liquidity on markets despite the increasing inflationary pressure. None of this then means that a market correction is imminent. But it is, nonetheless, one more consideration for any investor in assessing whether the rally can continue unabated.

There are no assurances. There never are. What the IPO flood reveals is that a large and diverse group of presumably savvy business people see a bright economic future and a market that might be pricing itself for something even brighter than the reality they see. It is a view that investors need to consider and one to which the flood of IPOs has called attention.

Comments


Leave a Reply


Your email address will not be published.