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.