Q3 2020 Capital Markets Update: What You Need to Know
After a historically sharp recession, the US economy moved into the early stages of recovery during the third quarter of 2020. While GDP fell 31.4% (at an annual rate) in Q2, it rose an estimated 33.1% in Q3. Unemployment continued to decrease, falling from 11.1% at the end of Q2 to 7.9% at the end of Q3. These improvements can be attributed to increased sales and consumer spending as businesses continued to reopen in Q3. As a result, the S&P and NASDAQ rose 8.5% and 11.5%, respectively, for the quarter. This increase in economic activity began a resurgence of interest from companies looking to enter the capital markets.
Investors continue to turn to SPACs over traditional IPOs given their unique advantages, such as more anticipated deal economic certainty, speed to market tailwind, and attractive redemption features.
SPACs are on the rise
Special purpose acquisition companies (SPACs) continued to surge in activity as an alternative way to access capital. SPACs accounted for 77 IPOs and raised $28.8 billion in the third quarter, up from 9 SPAC IPOS and $3.8 billion raised in the same quarter of 2019. The SPAC IPOs in Q3 more than doubled from the 27 SPACs in Q2. Investors continue to turn to SPACs over traditional IPOs given their unique advantages, such as more anticipated deal economic certainty, speed to market tailwind, and attractive redemption features.
Traditional IPOs remain high
The traditional IPO market soared to record levels this quarter. IPO volume increased by 126% from Q2 and was up 195% on a year-over-year basis, compared to Q3 2019. Similarly, total IPO proceeds totaled $61 billion in Q3 2020, which doubled the $25 billion of proceeds in Q2 2020.
High profile IPOs led the charge for IPOs in Q3. Ten different IPOs raised at least $1 billion each in proceeds. The largest IPO was Snowflake, which raised $3.4 billion in proceeds, making it the largest software IPO in history, and $1.3 billion more than the next largest IPO, KE Holdings, at $2.1 billion. Correspondingly, 106 IPOs fell within the $100–$500 million range. While economic activity has a long way to go to reach pre-COVID levels, traditional IPOs made a comeback in Q3 as some level of optimism returned to the capital markets.
DPOs gain traction
Similar to SPACs, companies continued to look for alternative ways to access the capital markets, such as direct public offerings (DPO). In August, the New York Stock Exchange received approval by the US Securities and Exchange Commission for companies to sell new shares in a DPO transaction on the NYSE. The SEC’s approval allows companies to go public by selling new shares directly on the NYSE without incurring the traditional significant underwriter fees common in a traditional IPO. If upheld (the Council of Institutional Investors recently filed a petition against the approval), the approval could continue to entice companies to go public via a less cost-intensive route. Palantir and Asana are two companies that filed updated Registration Statements in September to become public via a DPO. These filings are a potential indicator that large companies are eager to capitalize on the cost-saving aspects of DPOs.
M&A activity
During the second quarter of 2020, the pandemic resulted in the sharpest decline in M&A since the 2008 financial crisis. During Q3, the M&A market started to see a rebound in activity. Deal volume was up to 2,948 deals compared to 2,143 in Q2. Additionally, deal value rose significantly to $496.1 billion compared with $126.9 billion in the second quarter.
The main driver of this activity came from the technology sector. The technology sector showcased an increase in deal activity of 721 vs 661 in Q3 2019. Some of the major drivers of this increase were NVIDIA’s acquisition of Arm Ltd. from SoftBank Group Corp. for $40.0 billion; Analog Devices’ acquisition of Maxim Integrated Products, Inc. for $20.9 billion; and Oracle’s bid to acquire Bytedance Ltd. (Tik Tok) for $12.0 billion. Altogether, at least six deals were valued at over $10 billion within the technology sector.
Although M&A activity has begun to rebound, the deal landscape is clearly still impacted by the coronavirus pandemic. Deal volume is down 19.9% from the same quarter last year, signaling that the M&A landscape still has better days ahead.
Looking forward
While US capital markets began to bounce back from the unprecedented impacts of the pandemic, a significant amount of uncertainty remains well into the fourth quarter. Low interest rates and generous fiscal policy have led to a strong equity market in Q3. Companies capitalized on favorable IPO and M&A pricing, resulting in increased activity. However, COVID-19 and the recent US presidential election will certainly play a major role in how the economy moves forward. Renewed market volatility from a resurgence in cases and the aftermath of the election results could discourage companies from going public in the fourth quarter. As a result, IPO and SPAC volume may decrease from the record levels seen in Q3. Regardless, in a market where cost savings is crucial, expect SPAC activity to remain high as SPACs continue to provide investors with a shorter and less costly route of going public than traditional IPOs. For companies looking for how and when to access and deploy capital, management teams must continue to manage liquidity, understand their position in the market, and realign their strategy with the long-term market potential.
