Andrea Lauren: The IPO storm: how the global Covid-19 crisis has helped primary capital markets

Airbnb had repeatedly increased its quoted share price in the last month. After completing its investor roadshow, Airbnb had planned a price of U$ 56-60. But then DoorDash, a seven-year-old US food delivery company set its share price for its Wednesday IPO on the New, York Stock Exchange at U$ 102, and after the first day of trading saw its price grow by 85 % (and thus achieving a market cap of U$ 72 billion). The shares of C3.ai, an artificial intelligence company founded by software entrepreneur Tom Siebel, grew by 120 % after its IPO on the NYSE.

Airbnb therefore decided to increase the price of its shares. This afternoon we’ll see if that was the right step, but chances are that price of Airbnb shares will continue to climb. Airbnb’s key business is and has always been focused on travellers, both domestic and international, who use properties offered through its website as a more interesting or cheaper (or both) alternative to hotels. Back in April and May, things looked pretty bleak for Airbnb. Reservations via Airbnb had declined by 70 % worldwide, and CEO Chesky even had to go begging to investors, hat in hand, for U$ 2 billion in emergency funds. He received one billion from private equity firms Silver Lake and Sixth Street Partner combined with bonds bearing 10 % interest and warrants convertible at a market cap of $ 18 billion, and borrowed another billion for 5 years from Silver Lake, Apollo Global Management, Sixth Street Partners, Oaktree Capital a Owl Rock at a 12 % yield rate. Back then Chesky had to cut company costs radically, laying off 25 % of employees and completely eliminating marketing. At that time he was probably berating himself for not doing the IPO the previous year. How things have changed… So why are investors now not only going crazy over shares of a company like DoorDash that is demonstrably benefiting from the fact that everything is closed and people are eating at home, but also impatiently awaiting public trading of the shares of a company whose business is founded on the absence of travel restrictions and people continuing to rent rooms and apartments all over the world?

The answer likely involves several factors. In 2020 the global IPO market (this still primarily means the US market) set a new record for total volume of emissions. Up to this point in 2020, the volume of primary emissions on US exchanges was U$ 140 billion, significantly exceeding the previous emissions record from 1999, just before the internet bubble burst. This year’s growth is being fuelled almost exclusively by the stellar performance of tech company IPOs. Well, and both of the aforementioned companies are tech companies, unicorns. Both are also leaders in their field. Investors are interested in shares from anything that’s big and involves the internet.

The global Covid-19 crisis already has its first victims, of course, and some sectors, as well can all see, have been impacted more than others, with retail, hospitality, airlines, and tourism as a whole being the biggest victims. But there is one trend that spans all sectors: large companies are usually capable of surviving and gaining a significantly greater market share at the expense of smaller ones. Hence, Wizzair and Ryanair are getting ready to dominate the European low-cost airline market. Starbucks is already reporting expected accelerated growth in 2021, despite the fact that most if its customers aren’t going to the office and the downtown areas of cities where its stores are empty. But Starbucks has sufficient cash reserves and sufficient access to money from banks and public capital markets to survive, while small chains or individual cafés don’t. In general, we can expect consolidation in all sectors of human activity. And except for those that were free of all vision and innovation even prior to the Covid-19 crisis, it is precisely the largest companies that will end up being even bigger and stronger once it is over. Airbnb and DoorDash are certainly leaders in their sectors. Airbnb also has a big advantage over its competitors, traditional hotels. Even though the largest global operators like Hilton and Mariott no longer own hotels, but merely operate them, their costs are largely fixed and their business is substantially less flexible. Airbnb merely provides a universal digital platform, but leaves it up to the market and individual property owners to adapt and find their way out of the crisis. Be it absolute freedom when it comes to setting prices or use of apartments for purposes other than tourism, it seems that Airbnb is poised to further expand its role at the expense of the hotel sector. In Q3 2020 it reported $ 219 million in profits (as opposed to a loss of $ 576 million in Q2), primarily thanks to home businesses, where lots of Americans started renting, either leaving cities for the country or at least separating their offices from their homes.

Another oft-mentioned fact that is definitely behind the success of these IPOs is the increased digitalization of everything around us. Digital adoption of processes and customer behaviour that otherwise would have taken a decade or more was compressed into six months. Suddenly we have digitalized children six years and up, senior citizens up to the age of 80+, and the civil service all over the world. As soon as people pick up a habit, they usually keep it. That applies to e-commerce, booking plane tickets over the internet, and internet banking, and will also apply to food, education, and a myriad other activities. Suddenly all fund managers want in on this expected boom of the digital world.
And last but not least, a few companies will evidently disappear from US stock exchanges, so what’s to be done with the money that was invested in them? By this I mean Chinese companies listed on US stock exchanges that will have to leave them if they don’t start reporting their finances properly. One of the last things President Trump wants to do before leaving the White House is sign the Holding Foreign Companies Accountable Act, so that Chinese companies that don’t allow US audits of their financial statements will have to delist their shares in the USA. This seemingly obscure topic involves 217 companies with a total market capitalization of $ 2.2 trillion. Most investors holding their shares will either look for ways to invest in China via Chinese stock exchanges and ETF (exchange traded funds), or look to invest in other assets in a similar sector. Given that this primarily involves Chinese internet companies, the demand for their US sector competitors will likely increase.