After a boom year in 2021, what’s in store for the equity capital markets in 2022?
David Getzler, head of Equity Capital Markets for Societe Generale Americas, looks back at a fascinating year in Equity new issue markets in 2021, and offers his thoughts on what we might expect in 2022.
Jumping right in, looking back at last year’s big year in ECM in the US, what were some of the trends and highlights that stood out?
Well firstly, we all thought 2020 was going to be a hard year to beat, but in fact ECM issuance set a new record last year, reaching $443 billion, as issuers took advantage of favorable equity markets to raise capital, primarily to finance organic growth and M&A activity. This was in contrast to 2020, when issuance was driven more by companies’ need to recapitalize and strengthen their balance sheets in the face of tremendous uncertainty and challenges with COVID. The biggest driver of the record year was SPACs, which doubled their issuance from $83 billion in 2020 to $162 billion in 2021.
Drilling down a bit more, what were some of the most interesting transactions in 2021?
Rivian, the electric SUV and truck manufacturer, which went public in November was by far the biggest IPO in 2021 and the seventh largest U.S. IPO of all time. Let me remind you, Rivian has generated only $1mn of revenue so far, and it is still developing its technology.
Among already public companies, the biggest follow-on equity offering for the year came from Fiserv, the global payments and fintech solutions provider, which raised $2.7bn in an all-secondary issue. The largest convertible offering was from Ford which raised $2.3bn. Following a record issuance year in 2020, the convertible market remained very strong in 2021, driven by attractive terms to issuers who were able to monetize the elevated levels of volatility in their stock. With the major swings we are seeing in equity indices and stock prices, we expect this trend of higher volatility levels, and strong convertible issuance, to continue in 2022.
Now, looking ahead in more detail at 2022, what is your outlook for ECM issuance?
As a basic premise, if the Street’s consensus forecasts hold for S&P 500 earnings to be up 9% this year, and the S&P 500 index to be up 8%, that is a constructive environment for ECM activity.
However, there are many factors that are going to have an impact on equity markets. These include rate of economic growth, and the associated effect of COVID-Omicron virus; corporate profits, as I just mentioned; and then whether inflation levels will come down sharply over 2022, as is the consensus view. There are always going to be ‘Black Swan’ scenarios that may come out of left-field, such as potential for geo-political instability, or a new COVID variant. However, absent such an occurrence, there is a reasonably healthy scenario to point to for the equity markets in the year ahead.
I should also mention that in addition to the secondary equity markets looking relatively constructive for the ECM markets, we are expecting already-public companies to be active in seeking out acquisitions, which will be a driver for equity issuance.
Within ECM, what about the IPO market, following the record year in 2021 for issuance?
Interestingly, while the amount raised through IPOs at $142.5 billion was an all-time record, there were some worrying signs later in the year which may give pause to investor appetite; at least until we see how the first batch of IPOs perform. Specifically, the after-market performance of the IPO class of 2021 ended up being very disappointing. While among all 2021 IPOs, the average first-day trading gain was up 30.8%, by year-end the average IPO was trading down 9.6%. Concerns about the growth outlook for the large number of technology and biotech IPOs, especially in a higher inflation and interest rate environment, led to a re-rating of the valuation metrics of these growth-oriented IPOs.
The poor returns that investors earned on IPOs last year will factor into investors’ analysis when they value and ‘do the work’ on new IPOs in 2022. At the same time, there is a heavy pipeline with a number of interesting IPOs that we expect to come to market. Notable names include yogurt manufacturer Chobani, payment software provider Stripe, grocery-delivery service Instacart, private equity firm TPG, and India’s largest online retailer Flipkart, which is being spun-out by Walmart.
As in 2021, we are expecting a large flow of IPOs this year originating from venture capital and private equity backers. Venture capital was behind 14 of the 27 $1B+ IPOs last year. On the private equity/LBO front, the low interest rate environment over recent years has been very conducive for sponsor-backed transactions, and many of those deals are now being positioned for an IPO or M&A exit.
Beyond the broad picture for ECM activity this year, let’s discuss some of the prevailing trends. What do you see as the impact of ESG in equity capital markets?
ESG is increasingly a significant factor for investors, and discerning materiality in companies’ ESG efforts is the common theme to all the equity investors we talk to, and that covers all major global accounts. This is not as easy as it sounds because overall ESG data, and the quality of this data, remains very inconsistent. But the underlying principles are well understood by now, and financial indicators can increasingly be interpreted based on these principles. There are many practical expressions – in the current pandemic environment, investing in risk mitigation can matter a lot, whether around supply chain, cybersecurity, or workforce management, for example, in addition to environmental issues.
Interestingly, a company’s ESG-orientation has been quantified as providing, on a broad basis, enhanced returns; the S&P 500 ESG Index has outperformed the S&P 500 benchmark Index by 3% points over 2021 and 10% points over the past five years. We have data that measures stock price reactions to different types of ESG news announcements. The results show that stock prices have the greatest reaction to news or ESG issues that are classified as financially material for that specific industry; with positive news receiving a larger stock price reaction than negative news. As we look to 2022, truly material ESG considerations are set to continue to act as an integral component of equity investors’ long-term strategy.
And that other big trend, SPACs? How do you see that market evolving?
As I noted upfront, SPACs were the largest component of the ECM market in 2021. The big change in SPAC activity last year was the number of SPACs, which nearly tripled from 248 in 2020 to 610 in 2021. This huge increase in the number of SPACs lowered the average size of each SPAC issue from $336m in 2020 to $266m in 2021, a 21% decrease.
SPAC issuance peaked in the first quarter of 2021, contributing to 62% of the year’s proceeds. Issuance dramatically slowed down mid-year, after the SEC paused the extremely high-volume issuance in order to add a new accounting rule, restricting the equity treatment of warrants to “temporary” equity. While this did not hinder SPACs from being filed, it did force a number of issues to pause and have auditors revise the accounting statements. After the rule change came into effect the market rebounded sharply in Q4 as smaller issues with better warrant incentives came to market. A catalyst that could substantially slow down the market would be many of these SPACs failing to find an acquisition target, which would likely start to materialize in late 2022 or early 2023. Until then we don’t see any see any signs that SPAC activity will slow down, as there is still $59bn worth of SPACs that have filed currently waiting to IPO.
What is the outlook for Chinese companies listing in US equity capital markets?
We are not expecting to see many Chinese listings in the U.S. this year, following developments last year. Concerns that emerged during 2021 about the Chinese government’s plans to restrict overseas listings by Chinese companies led to a dramatic pull-back in U.S. listings by Chinese companies. Only three of the 34 Chinese companies listing on a U.S. exchange in 2021 came in the second-half of the year. A prime example of this was Didi, which is China’s ‘Uber’; announcing plans in November, only five months after its U.S. IPO, to delist from the NYSE and switch their primary listing to Shanghai or Hong Kong. Reflecting investor concerns about these political and regulatory developments, there was a big sell-off last year in Chinese companies listed in the U.S. Alibaba plummeted 49.0% over the year and the benchmark Nasdaq Golden Dragon China Index, which tracks all Chinese companies listed in the U.S., dropped 42.0%.
What about companies repurchasing their shares? Will that theme continue this year?
After a heavy cut-back in share repurchase activity in 2020, driven by companies concerns about the impact of COVID on their business and any negative political repercussions, we saw the level of share buybacks rebound in 2021, especially in the second-half of the year, as companies became increasingly confident about their business outlook. As of the latest data, through Q1-Q3 we have had $612 billion in share buybacks, which is already above the full year 2020 number of $520 billion. Q3’s share buyback volume at $235 billion was a quarterly record, topping the previous record of $223 billion in Q4 2018. We are now forecasting 2022 to hit an all-time record for share repurchases, as companies generate record profits and cash flow, and are able to finance share buybacks through issuing debt at still very low interest rates.
So, all said, absent some ‘black swan’ event, I see a reasonably healthy scenario for the equity markets in the year ahead.
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