Not since 1999 have IPOs been so hot. In the US, in the last 18 months, the number of IPOs – counting SPACs too – is on par with the heyday of the late 90s. Meanwhile, the issuance proceeds from operating companies (ie not SPACs) matches the previous peak set in 1999 of $65bn for 2020. Including SPACs, it smashes that record with $145bn. Perhaps more importantly for the narrative, and investor enthusiasm, first day gains for IPOs currently average 40.5% (according to Dealogic), a level previously seen in the late 90s heyday. The snippet below is from a Forbes article and neatly sums up the current state of play…

“To say that Initial public offerings (IPOs) have caught the investor community’s imagination would be an understatement. The triple digit first-day gains and an unbridled demand for Internet-related stocks have led the IPO market to new highs. According to Newark, N.J.-based Securities Data Company, IPO activity (year to date) has topped $50 billion, of which more than $26 billion in IPOs has been information technology related.”

Forbes article from June 2021 November 1999

Actually, this article was written in November 1999 but it may as well have been June 2021. Here is a more recent Reuters version: U.S. IPOs hit annual record in less than six months.

Figure 1: US IPO proceeds and # of IPOs. Source: Warrington School of Business, ShadowFall

The sound waves from this American IPO-fest have unsurprisingly reverberated across the Atlantic and reached the shores of Europe, which has experienced the largest half year of IPO proceeds raised in over a decade and, if annualised, would also match levels last seen in 1999. In terms of the number of unique IPOs, it would be the largest on record. Below we look at the data for just H1 2021 from PWC’s IPO Watch series.

Figure 2: EU IPO proceeds and number of IPOs. Source: PWC IPO Watch

The question investors need to ask themselves is whether this party is on its last legs, in a similar manner to the final raucous scenes from the infamous night out in The Hangover. Will those IPO investors find themselves waking up, face down on the floor, a tooth missing and Mike Tyson’s tiger purring in the bathroom? … for those with active short books they will be wondering if they are the tiger …

Figure 3: Stu (Ed Helms) wakes up after a night in Las Vegas from the movie The Hangover. Source: AF Archive / Alamy Stock Photo

As alluded to earlier, one of the most notable elements to the recent IPO activity is the first day gains being made. To some degree this has started to falter in Europe, (which we analyse in more depth later on), however looking at US data over a longer time period, the chart below gives some historical context and while it ends at 2020, this trajectory has continued in 2021. Furthermore, the median price-to-sales ratio at the offer price isn’t far from the levels recorded during the peak excitement in 1999/2000 and matches it for the first close price to sales.

Figure 4: US first day gains and price to sales. Source: Warrington School of Business, ShadowFall

Using IPO data from the University of Florida’s Warrington School of Business, which has a comprehensive databank for the US of more than 8,000 IPOs, we can pull out further detail. For instance, the number of IPOs with negative EPS has reached similar levels to 1999, equally the first day gains made for those loss-making IPOs has far out-stripped those with positive EPS.

Figure 5: US first day gains shown depending on EPS. Source: Warrington School of Business, ShadowFall

Investors looking at these charts should be taking note.. Even here in the more traditionally conservative UK market, of the 20 companies that listed in Q1 2021, 13 outperformed the index in that quarter delivering an average gain of 21% vs the FTSE all share.  For us, there is something of a cautionary tale the strength of the gains being made.


For a start, the track record of beating the market by buying IPOs for the long-term, using our US dataset, is not something to shout about. Whilst the average first day gain is 17.9% from 1980 to 2019, the 3-year buy and hold return from the offer price averages just 42.3% or 2.1% outperformance when taking into account market returns. If you are late to the party, then the story is worse; from the first close price the 3-year buy and hold returns a mere 24.4% or a -15.8% underperformance relative to the market. If you chose to avoid smaller companies (ie sub $100m of sales) your chances of outperforming the market would improve significantly but this would still only lead to a 2.7% return, and a 5.3% return if you only look at those with sales >$1b.

Consider these pretty sobering long-term statistics on IPOs with at least $100m of sales (data from 1975 to 2015):

  • 44% of IPOs deliver NEGATIVE 5-year buy and hold returns from the offer price.
  • 47% of IPOs deliver NEGATIVE 5-year buy and hold returns from the first close price.
  • 60% of IPOs deliver <8% (ie sub market) CAGR on a 5-year buy and hold basis from the offer.

Indeed, if we plot the 3-year buy and hold returns vs the market, from the first close price and compare it to the median price to sales at first close we can see that, unsurprisingly, only those years that haven’t started at exorbitant valuation levels have gone on to deliver some form of positive return (albeit rarely ahead of the market as we have discussed). 2018 and 2019 are shown differently on the chart due to the fact 3yr buy and hold returns are incomplete.

Figure 6: Relative 3-year market returns vs price to sales at first close. Source: Warrington School of Business, ShadowFall

Furthermore, closer inspection of the following 3-year returns shows that it is only due to the market performance in recent years, helped by unlimited FED and ECB liquidity, that has helped shore up the average return metrics for IPOs shown earlier – indeed the outlier nature of 2018 and 2019, still incomplete for full 3 year returns data, is clearly shown in the above figure.

Figure 7: Buy and hold returns and first day gain plotted by year. Source: Warrington School of Business, ShadowFall

Q1 2021 European IPO issuance has also set records and similarly H1 2021 looks to have set a new high watermark level of IPO issuance. Even well-established listed companies are taking advantage of the IPO fever as this plot of the quarterly rolling mentions of “IPO” on EU conference calls, not including financials, demonstrates. The surge since the middle of 2020 is clear  and for further context, we note discussion generally relates to the notion of IPO’ing “undervalued” parts of already listed businesses… one for our event driven clients.

Figure 8: Rolling mentions of “IPO” in EU conference calls. Source: Sentieo, ShadowFall

Leveraging Bloomberg’s screening tools, we’ve been able to look under the hood of European IPO issuance with a bit more granularity (we’ve  screened for proceeds above €150m – ie just larger IPOs) . What we find interesting is that as opposed to fresh capital being raised for the Issuer, or so-called “new money”, IPO proceeds appear to be heavily weighted towards satisfying cash outs by the owners, generally from founders, VCs or PE firms, otherwise known as “old money”. We refer to this new and old money as Primary and Secondary Issuance, respectively, in the rest of this report.

In many cases – as we come onto in more detail later on – enormous wealth has been extracted by these founders even if there is still plenty of “skin in the game” via residual ownership.  Such significant capital extraction, at a high point in markets is in our view a very real red flag. It is no coincidence that the peak in IPO proceeds (Primary and Secondary) neatly lines up with peaks in number of IPOs and the performance of the SXXP in the chart below (blue line).

Figure 9: EU IPO issuance proceeds vs SXXP (note 2021 has been annualised). Source: Bloomberg LP, ShadowFall Calculations
Figure 10: EU IPO issuance proceeds vs SXXP (note 2021 has been annualised). Source: Bloomberg LP, ShadowFall Calculations

All very interesting, but to identify whether this thematic is actionable, we have looked in detail at 16 of the biggest IPOs across Europe since the start of the year (and included THG and JDE Peet which took place in 2020). Within this opportunity set, we’ve looked with impartiality in order to try and get a better understanding of what specific signals are coming from this IPO glut and whether any stocks stand out and, if so, for what reason. We found the results very insightful…

Figure 11: IPO proceeds broken down for major EU IPOs. Source: ShadowFall Calculations, Company Prospectus

Published: 12th August, 11:45am

Contact: [email protected]

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Jules Hull

Jules Hull

Jules Hull is Director of Research of ShadowFall Publications Ltd and of ShadowFall Capital & Research LLP.

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