Insights > Capital Markets Thrive Across IPOs, Tech-Focused M&A, and SPACs

Capital Markets Thrive Across IPOs, Tech-Focused M&A, and SPACs

The US economy continued its strong growth in the second quarter of 2021 as the government maintained a financial policy favorable for pandemic recovery. US gross domestic product (GDP) is expected to surge throughout 2021, with forecasts showing an increase of 6.5% in the second quarter, continuing the steady increase of 6.4% in the previous quarter. The vaccine rollout, the continued reopening of the economy from government shutdowns, and the monetary stimulus were strong drivers of the GDP increase. Unemployment showed minimal movement during the second quarter; it sat at 5.9% in June 2021, barely down from 6% in March 2021. The unemployment rate is tracking closer to the pre-pandemic levels, which was 4.4% in March of 2020. Widespread job growth showed large jumps in some industries, including leisure and hospitality, education, and business/professional services.

During the second quarter, the S&P and NASDAQ rose 6.9% and 7.6%, respectively, continuing stellar year-to-date performances as the S&P is up 16.1% and NASDAQ up 14.2%. This economic growth has fostered some concern over inflation: one key inflation measure increased nearly 4% year-over-year. In turn, the Federal Reserve revealed a tightening of economic policy through increased interest rates. Regardless, capital market transactions continued surging through the second quarter of 2021.

The capital market trends point to a continued high level of activity for IPOs and M&A activity, likely to be dominated by technology and digital transformation, along with solid market gains expected through the second half of 2021.

Traditional IPOs maintain momentum

The traditional initial purchase offering (IPO) market enjoyed another productive quarter with 113 IPOs generating nearly $40 billion in capital, a solid step-up from the already significant 91 IPOs generating $38 billion in the first quarter of this year. Led by biotech, the healthcare and technology sectors were at the forefront of the second quarter’s activity, with a combined 88 IPOs in the quarter.

At $4.4 billion raised, the IPO for the ride-hailing company DiDi Global Inc. was the biggest of the second quarter, although its stock price plummeted after the IPO due to an investigation launched by the Cyberspace Administration of China. On a tastier note, Krispy Kreme returned to the public markets with an IPO that raised $500 million. The high pace of traditional IPOs should continue during the second half of 2021 as companies try to capitalize on high valuations during this period of economic growth.

Favorable outlook continues for SPACs despite latest SEC scrutiny

Special purpose acquisition companies (SPACs) continued their tremendous rise in popularity as an alternative way to access capital. The blistering pace set in the first quarter (in which 298 IPOs raised almost $88 billion) cooled off to a more sustainable level in the second quarter, with 60 SPAC IPOs raising just under $13 billion. A similar pace of SPAC IPOs will likely continue for the second half of 2021.

The slowdown of SPAC activity in the second quarter of 2021 can be partially attributed to recently updated SEC guidance. One component of the updated guidance is the treatment of SPAC warrants as liabilities versus equity instruments. Another component is the SEC scrutiny into SPACs, which has brought on further considerations regarding the de-SPAC process. These considerations include more legal responsibility related to de-SPAC disclosures such as registration statements that may contain material misstatements or omissions, which are subject to Securities Act Section 11. The unique advantages of SPACs, such as speed to market, should remain extremely appealing to investors as the economy grows, despite the updated guidance from the SEC.

Technology sector drives M&A activity

Mergers and acquisitions (M&A) activity for Q2 2021 was up compared to the same quarter last year; however, activity slightly slowed from the first quarter of this year. In the second quarter, deal volume totaled 4,369 valued at $827 billion compared to 4,456 valued at $859 billion in the previous quarter.

This increase in activity from the prior year was primarily driven by the technology services sector, in which deals increased from 405 to 978 in the second quarters of 2020 and 2021, respectively. Among the largest deals announced in June were a group of private-equity firms acquiring a majority stake in medical supply and equipment company Medline Industries for $30 billion, and Danaher Corp’s acquisition of biotech and pharmaceuticals company Aldevron LLC for $9.6 billion

Anticipating what’s ahead: inflation, stimulus plans, and technology-centered opportunities

Capital markets are thriving in the current favorable economic environment. However, inflation risk could cause the Fed to increase interest rates and tighten monetary policy earlier than expected. Per the Federal Open Market Committee’s July meeting minutes, the Fed will likely begin tapering the pace of bond purchases before the end of the year. On the other hand, US Treasury yields, which typically serve as an indicator of reduced inflation risk, decreased from a 10-year yield of 1.74% at the end of the first quarter to 1.47% at the end of the second quarter

The Biden administration is working to pass the Build Back Better plan, which would contain roughly $1.8 trillion of fiscal stimulus. The next phase of this plan is a $1 trillion infrastructure bill, which is pending congressional approval. These economic stimuli could serve to maintain the growth in the economy that has been enjoyed over the first half of 2021.

The capital market trends point to a continued high level of activity for IPOs and M&A activity, likely to be dominated by technology and digital transformation, along with solid market gains expected through the second half of 2021.

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