Why IPOs may boom in this new Policy Regime
Over the past 25 years have seen debt financing replace equity for many companies – resulting in a major de-equitization process, but if the new policy regime pushes equity valuations and bond yields higher, we may be starting to see a new era of re-equitization.
The starting point is how to resolve excess leverage – since corporate debt is a key legacy of the GFC and COVID pandemic.
•Unlike previous recessions when companies tended to de-lever, the COVID crisis has seen corporate debt rise sharply in real terms (for the US +7.4% over 12m, +25% over 5 years) and as a % of GDP, with debt over the last 5/10 years rising faster than at any time in the last 50 years.
•The distribution of that debt is also a concern: small and mid-cap companies have record levels of debt/EBITDA despite wafer-thin margins.
•Moreover, the corporate debt built up in this cycle is securitized debt rather than bank debt (corporate bonds as a share of corporate debt has risen from 25% to 50% over the last 35 years), while the quality of the debt has fallen (share of BBB or lower is 60% vs. 40% in the early 1990s. Clearly echoes here of the sub-crime crisis, making the likes of the IMF nervous about financial stability.
De-equitisation has been an important theme for 25 years.
•Easy access to cheap debt and increased buybacks has seen the debt/equity ratio almost double from 40% in 2011 to over 70% in mid-2020.
•The number of publicly listed companies has halved in the last 20+ years while the number of private equity owned US companies has risen by close to 60% in the last decade.
De-equitisation may shift to a trend towards re-equitisation, partly c/o the recent shift in macroeconomic policy regime.
•The previous peak in equitization in the late 1990s was partly driven by the rapid rise in valuations post LTCM. If we were to see the new policy regime trigger a 1980s-style Japanese melt-up , the scope for a major new IPO bubble is high. This would also help re-circulate excess household savings back to the corporate sector.
•Private Equity companies might also take advantage of high valuations to IPO their companies: the 2020 IPO data suggests this may be starting to occur – see HERE.
•Highly indebted publicly listed companies may also opt to pay down debt and issue equity, while M&A and corporate divestments
•Governments might be another source of equity issuance if they resort to privatisations to bring down their debt levels.
•Cometh the hour – cometh the product - SPACS! SPACS have emerged to be a key instrument in the process with 248 new SPACs in 2020 – raising £75bn – these are likely to see even more focus.