Q2 2020 Capital Markets Update: What You Need to Know
COVID-19 has continued to cripple the US economy as we head into the second half of the year. After real gross domestic product fell 5.0% (at an annual rate) in Q1, it fell another 32.9% in Q2. While unemployment rose from 4.4% in March to 14.7% and 13.3% in April and May, respectively, this number began to drop in June as businesses reopened which bolstered stock growth and asset prices. Similarly, the NASDAQ rose 31% from Q1 and the S&P delivered returns of almost 21%. The June uptick started revitalizing interest from companies looking to enter the capital markets with companies in the technology sector particularly active in driving a surge in capital markets activity. As COVID cases began to spike again in late June, however, renewed uncertainty is clearly evident in the market.
In early Q2 2020, the pandemic resulted in the steepest decline in M&A activity since the 2008 recession.
SPACs on the rise
Companies have continued to increasingly turn to special purpose acquisition companies (SPACs) as an alternative way to access capital markets. 2020 has seen historic levels of SPAC activity. Through Q2, SPACs have accounted for 40% of IPO volume and 33% of IPO proceeds for the year. On June 22nd, Pershing Square Tontine Holdings Ltd. Filed for a $3 Billion SPAC. This would be the largest SPAC in history. The rise of activity and value is continuing to expand the growing interest in SPACs that has been displayed for the past few years. Investors may continue to turn to SPACs as they offer a unique investment opportunity with a more attractive yield for initially vested capital than US Treasuries.
The IPO market hit a significant pause due to the capital markets fallout driven by COVID-19. Many IPO candidates began to face funding and liquidity challenges that caused companies to hesitate and postpone action until Q2. IPO volume fell by 23% this quarter as compared to Q2 2019. However, during the latter half of Q2 2020, the market started to see an increase in activity as businesses reopened. As the S&P rebounded in June (up 39% from March), investor confidence began to resurface.
There were 41 IPOs in June—up from 25 in April and May combined. Additionally, due to the increase in activity in June, IPO proceeds for Q2 totaled $25 billion, which was up from $9.1 billion in Q1. Three mega IPOs led the charge for the second quarter: Royalty Pharma Plc at $2.2 billion, Warner Music Group at $1.9 billion, and Dun & Bradstreet Holdings at $1.7 billion.
As COVID related restrictions caused people to stay home, people turned to technology solutions for work and entertainment. Companies within the health and technology space have been particularly active during this period, accounting for 32 of the total 66 IPOs in Q2. The financial services sector was the only other industry that saw double digit IPOs with 21. After the financial services sector, the next closest sector had a total of three IPOs. Industries such as technology are thriving while hospitality is dwindling.
In early Q2 2020, the pandemic resulted in the steepest decline in M&A activity since the 2008 recession; US activity dropped nearly 30% from the same time last year. Additionally, M&A volume fell by roughly 32% from March to April. As a result, deal value fell by nearly 80% from Q2 2019. However, as Q2 progressed, indicators started to point to the market beginning to stabilize. Deal volume increased 6% from March to April and then increased another 32% from May to June.
Although investors began to pursue M&A activity more aggressively in the back half of Q2, deal size dropped quite significantly year over year. This year, Q2 saw only three megadeals (deals valued at $5+ billion) whereas Q2 2019 showcased 18 megadeals. The value of megadeals dropped substantially as well. The largest deals in Q2 were under $10 billion, such as the Just Eat Takeaway.com acquisition of Grubhub for $7.3 billion and Cannae Holdings and Senator Investment Group’s Proposed Takeover of CoreLogic of $6.2 billion.. By contrast, Q2 2019 saw several deals exceeding $60 billion, including United Technologies & Raytheon’s Merger of roughly $120 billion and the AbbVIe Inc. acquisition of Allergan PLC for $63 billion.
Similar to IPO activity, many M&A deals took place within the technology sector. As people stayed home due to COVID restrictions, technology solutions became the primary driver of work and entertainment. Technology deals accounted for 339 acquisitions in Q2, outpacing the next closest sector, consumer markets, by 101 deals. Just Eat Takeaway was one such deal; the company confirmed its agreement to acquire GrubHub in an all-share deal for $7.3 billion during Q2.
Overall, COVID-19 had an outsized impact on the technology sector. Many companies have announced their intention to continue their remote work policies, which has made technology companies attractive targets for buyers looking to make a splash. In May, Twitter CEO Jack Dorsey announced that employees would be permitted to work remotely indefinitely. As other companies begin to follow this trend, technology companies will play a large role.
While the US capital markets began to recover from unprecedented COVID impacts in the first half of the year, a significant amount of uncertainty remains heading into the back half of 2020. Two of the biggest concerns are the continued impact of COVID-19 and the upcoming presidential election. Until there is a widely accessible vaccine, economic uncertainty is ostensibly the new normal. The current pandemic is influencing decision makers on how and when to access and deploy capital. Sponsors, management teams, and stakeholders can control their preparedness for when the capital market window opens back up by managing liquidity, understanding their near-term position and realigning their strategy with the long-term potential that presents itself.