March 4, 2020
As the 2020 presidential election draws closer, companies considering an IPO are increasingly discussing the potential impacts on their plans to go public. They correctly recognize key company and industry issues intersecting with the regulatory and political environment and worry the election may significantly affect their company’s prospects. In addition, technology and data-enabled companies are facing increased regulatory scrutiny around the use of artificial intelligence (AI), antitrust and data privacy, which is catching the attention of investors and senior leaders of pre-IPO technology companies as they consider the future. In addition, global trade conflicts, the coronavirus and consumer privacy issues are driving episodic fear among business leaders.
Given these forces at play, many market participants have been advising IPO candidates to avoid the second half of 2020. Is this caution warranted? In our view, no. History shows those concerns are overdone. Historical IPO volume has been largely unaffected in previous election years, with the exception of biotech/pharma which has been hurt by political saber-rattling on drug prices.
As we digest the Super Tuesday primary results, it makes sense to take stock of how the IPO market has fared in the opening weeks of the year. In a strong start, 24 companies came to market with a median return of 20%. This isn’t entirely surprising. Keys to a well-functioning IPO environment include foundational elements such as a solid economic indicators (GDP growth, a stable interest rate environment, low unemployment) and equity markets that are in positive territory. Low volatility as measured by the VIX, which reflects broader global market considerations (China/US trade policy, Brexit, regional economic strength in Europe and Asia, etc.), is also important. As we kicked off 2020, these foundational elements for a strong IPO market were in place, although the equity markets have taken a hit due to worries of a coronavirus pandemic which has left equity markets down YTD and the VIX has spiked northward. Absent a pandemic, the equity markets should return to relative calm and allow growth investors to focus on new IPOs.
Keep your eyes focused on the Russell 2000 — a good benchmark for IPOs — as most election years have been characterized by positive returns.
Putting aside volatility associated with the coronavirus, should we expect the strength of the 2020 IPO market to continue given it’s an election year with much of the campaigning yet to play out? Considering the history, our short answer is yes.
Based on our analysis of past elections and IPO activity, companies generally shift their IPO timing forward or backward by a week or two to avoid pricing the week of an election, but they don’t decide to stay private due to elections. In fact, in 2000 and 2004, nine IPOs priced during the election week, although it appears the last three elections saw a more conservative approach, with no pricings in election week. The data shows slightly more active weeks ahead of an election and solid activity in the weeks following an election, notwithstanding the challenges of the holiday season truncating the Q4 IPO calendar.
The notable exception to this line of thinking would be found in the pharmaceutical and life sciences sector. Drug pricing has been a focal point of political dialogue, which can be harmful to investor sentiment for new issuers. Interestingly, a rally in biotech/pharma stocks in Q4 2019 continued into 2020 and supported a very active calendar of IPOs in early Q1. Of the 24 IPOs priced this year, six were from the pharma life sciences sector. Median returns of 47% are likely to foreshadow more activity from this sector. And it wouldn’t surprise us if some of these issuers accelerated their preparations for an IPO in early 2020 to avoid a potentially more challenging headwind as the elections heat up.
Companies considering an IPO in 2020 should focus on their fundamentals (key performance indicators like revenue, cash flow, profitability and governance) and how their IPO timing dovetails with a long term capital plan. We wouldn’t advise artificially rushing or delaying pricing due to the presidential election. Absent extended market volatility as a result of Covid-19, we believe Q2 could see the resumption of strong IPO activity. We’re confident the market will widen beyond pharma and life sciences, consumer, and real estate IPOs to include sectors such as technology and financial institutions — both of which are historically active IPO domains. The important thing to remember this IPO season is that while the election may dominate the headlines, it isn’t the main driver in the decision to go public.