Paul Hastings Sees Active IPO Market

While the U.S. IPO market ground to a halt this spring due to the outbreak of the COVID-19 pandemic, beginning in May the market came roaring back, allowing companies with IPO plans in the pipeline before the start of the pandemic to access the market.

The summer resurgence has set the stage for an active IPO market in September and October, with COVID-19 increasingly a focus of disclosure and marketing. These conclusions are drawn from law firm Paul Hastings’ just published Going Public: The U.S. IPO Report, which examines data from 28 IPOs that priced in the first half of 2020 with base deal sizes over $75 million.

“In our semi-annual report we provide an in-depth look at the state of the U.S. IPO market. But while the report examines this particular period of market activity, our team is continually reviewing IPOs on a real-time basis and developing deeper analyses and period-over-period insights that give us valuable knowledge we can leverage in approaching and executing IPOs,” said Frank Lopez, co-head of the global securities and capital markets group at Paul Hastings. “The IPO market has made a major comeback this spring and summer—and we look forward to a busy fall. We anticipate that companies able to market their success during the COVID-19 pandemic are likely going to seek to access the market later in 2020 and into 2021.” Mr. Lopez is also a partner in the firm’s leveraged finance practice and is based in New York City.

Despite several mega-IPOs, medium-sized deals still prevail. Indeed, almost 45% of IPOs in the study were in the $100 million to $299 million range. However, the first half of 2020 has also seen a return of mega-IPOs over $750 million, with almost 30% of deals in this range in the first half of 2020, compared to just over 15% for full-year 2019.

Life sciences and biotech issuers, along with special purpose acquisition companies (SPACs), dominated the first-half 2020 IPO market, but broader sectors returned late in Q2 and into Q3. Even more than historical trends, life sciences and biotechnology IPOs, in which issuers raise smaller amounts of capital, dominated the market by deal count. While these issuers accounted for approximately 34% of deals in full-year 2019, they accounted for over 60% of deals in the first half of 2020.

According to Paul Hastings’ report, the SEC review process remains streamlined, but deals are taking longer to complete. While the SEC comment process remains streamlined, with an average of 3 comment letters and an average of 15 comments in the first letter in the first half of 2020, compared to 19 for full-year 2019, the time to market has increased by over a month. This increase is likely driven less by the SEC process and more by the market slowdown and volatility caused by the COVID-19 pandemic.

Q2 saw a return to secondary sales following no secondaries in Q1. While none of the IPOs in the Paul Hastings’ study from Q1 2020 had a secondary component, almost 30% of IPOs in Q2 contained a secondary component, leading to a total of 18% of issuers in the first half of 2020, compared to just under 30% of deals in full-year 2019. The prevalence of life sciences and biotechnology IPOs likely drove this decrease in secondary components since these companies can access the public markets at an early stage in their lifecycle when exits are less common at time of IPO for founders and early-stage investors.

Other Findings

  • Pricing rebounded, with half-year 2020 pricing exceeding pricing in 2019. Approximately 65% of IPOs priced above the midpoint of the range in the first half of 2020, compared to just under 50% in full-year 2019.
  • Sponsors may see the public markets as more attractive than private sales. Going into the latter half of 2020 and into the first half of 2021, we expect that there may be an uptick in IPOs by sponsor-backed companies, as the public markets may be deemed better options for valuation compared to the private markets, as we have started to see sponsor-backed deals return to the market in Q2 and into Q3 2020.
  • Virtual roadshows are the new normal. As financial markets professionals and issuers shifted to working remotely, the IPO preparation process and marketing process have gone virtual.
  • Two years of financial information has become the new normal—particularly for life sciences and biotechnology IPOs. 90% of emerging growth companies (EGCs) in the study relied on JOBS Act accommodations to present only two years of audited financial statements and two years of selected financial statements—underscoring that these trends are the new normal. (The Jumpstart Our Business Startups Act, or JOBS Act, was signed into law in 2012 to encourage funding of small businesses in the US by easing many of the country’s securities regulations).
  • Despite some trends in Q4 2019 toward IPO issuers that were profitable, IPO issuers in the first half of 2020 largely were unprofitable, led by life sciences and biotech IPOs. Approximately 77% of IPO issuers in the first half of 2020 presented net losses on a GAAP basis, compared to 67% for full-year 2019.
  • Underwriting commissions are trending toward the historical norm of 7%, reflecting the decrease in high-profile IPOs where issuers had been able to negotiate lower fees.

Paul Hastings is one of the largest law firms in the United States, with over $1.2 billion of revenue in 2018. The firm is headquartered in Los Angeles with more than 22 offices located throughout Asia, Europe, Latin America, and the United States.

The firm’s securities and capital markets group serves clients that are active in the energy, financial services, technology, industrial, life sciences, and real estate sectors. The group’s attorneys have expertise with Sarbanes-Oxley, Dodd-Frank, JOBS Act, and stock exchange requirements, as well as compliance with Exchange Act-governed SEC reporting, proxy solicitations, and disclosure obligations.

For a full copy of Going Public: The U.S. IPO Report click HERE.

Private Equity Professional | September 25, 2020

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