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IPO: the end of euphoria - what happened?

07 / August / 21 Bunsi Shakiramal Visitors: 268 Rating: ★★★★★

Last fall, our team gave its vision of whether it is possible to earn money from an IPO. A few months later, we decided to look at the IPO phenomenon in more detail and understand: can an acceleration or slowdown in investor demand for IPOs be considered a leading indicator of market liquidity?

In 2020, the world saw a real boom in IPOs

According to Refinitive, IPO activity by investors is cyclical. The investment growth cycle after 2008 has decreased by almost 1.5 times from 6 years to 3-4 years due to still fresh memories of the 2008 global recession caused by the mortgage crisis in the United States. At the end of 2020, the global volume of funds raised for IPOs approached the maximum in 2007, which was an unprecedented event in the face of uncertainty about the future recovery of economic activity.

The graph shows that the main growth in the volume of funds raised through a classic IPO fell on the United States and Asia, while in Europe the demand for IPOs decreased. The low cost of money and the high level of liquidity in the economy spurred the demand for "quick" money almost at the end of the next round of the growth cycle.

The global IPO euphoria continued at the beginning of 2021, when funds were raised in the first 2 months of 2021 as for the entire 2016. However, these are indicators that show the past, as if we were looking in a car's rear view mirror and navigating through it.

Investor interest in IPO will decline

As a leading indicator, we decided to take the dynamics of shares of companies that went public since February 2021, and compare the dynamics of all IPOs that came out from June 2020 to March 2021.

We see that the average IPO returns on the horizon of 1 day, 30 days, and also from the beginning of the listing show a similar downward trend. From June to November 2020, the profitability of investors in the allotted periods of time decreased and reached a local minimum in November. The spike in IPO yields in December was largely due to the pre-New Year rally in securities, as well as positive investor reactions to the new stimulus package.

Then we see that the average investor returns began to fall sharply and reached a new local low in March. This means that more people began to take losses from the IPO. In turn, this may indicate the end of the IPO investment growth cycle and the withdrawal of liquidity from the stock market. For example, on the first day of trading on the stock market, Deliveroo (LON: ROO) lost more than 30% in value.

The gradual loss of investor interest in IPOs due to increasingly frequent losses is also shown by the IPO ETF from the investment company Renaissance Capital (ticker: IPOUSA). From February 15 to March 29, 2021, the IPO index fell by 25%. It should be noted that such overheating of the sector was not observed in any IPO-financing cycle. Due to the overheating of the IPO market, many companies simply postpone the moment of going public until a more favorable market situation. For example, on March 31, 2021, it became known that the Kultura holding postponed the IPO indefinitely.

The peak in the volume of funds raised under the IPO coincided with the peak in the share of companies that showed only losses at the time of the start of trading in shares. A similar situation was observed during the dot-com bubble and reversals of the IPO cycle, for example, in 2015. When evaluating such enterprises, investors expect brilliant results in the future, but with the arrival of quarterly reports, both optimism and company values  are crumbling. Given the significant overheating of the sector in question and the mismatch of investor expectations with the financial results of corporations, we can also observe a decrease in the average return on investment in an IPO since the beginning of the listing. This will only accelerate the outflow of investments from the IPO environment.

The end of the IPO financing cycle coincides with a decline in the annual return on the stock market. The expected outflow of liquidity from the IPO sector could lead to a decrease in the yield of the securities market in the future.


Investor IPO activity is cyclical. The round of growth and decline in investments lasts 3-4 years on average. Over the past year, the world has seen not only an unprecedented surge in people's interest in "quick money", but also the maximum inflow of investments in IPOs. The decline in the average return on investment in an IPO on the horizon of 1 day, 30 days and since the beginning of the IPO indicates that more and more people are suffering losses. This could mark the end of the IPO investment growth cycle and liquidity withdrawal from the stock market.

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