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Is the capital market evolution likely to continue?

Capital markets: What we are looking at

Investors are deploying large amounts of capital into both the equity and debt markets as the US begins to contemplate a post-COVID-19 recovery. Investor demand is expected to complement the capital markets pipeline, which remains crowded with high-quality issuers.

In 2021, the real GDP growth rate in the United States is expected to increase at its fastest pace since the early 1980s. Economic activity should grow substantially during the summer months as a result of the $1.9 trillion stimulus package and the deregulation of the service sector. Though there remains some uncertainty, we expect the economy to grow by 5.5% this year, with growth and some strength continuing into next year.

The IPO and SPAC market is on fire

As a result of the ongoing SPAC attack, 389 IPOs raised $125 billion in the first quarter, a record sum. The number of traditional IPOs declined over previous quarters, as the market's desire and attractiveness for a broad range of SPACs (special purpose acquisition companies) targeting multiple industries was the biggest factor behind the increase. The media generated a great deal of interest by focusing on high-profile SPAC mergers. In addition to a healthy supply of potential IPO candidates, investors will continue to show interest in IPOs in 2021, but the pace of IPOs remains uncertain.

IPO markets around the world have continued to be active, after continuing to gain momentum since the first half of last year. Funds raised are over three times higher than the amount raised for the same period last year.

Exhibit 1

63% of global IPOs total $61.4 billion from the US, Hong Kong, and A-Share markets.

US, Hong Kong, and A-share markets were the leaders globally during Q1 2021. Globally, they raised $61.4 billion, which accounted for 63% of the proceeds.

According to the NASDAQ, traditional IPO proceeds totaled $22.1 billion. Second place went to the NYSE with $15.6 billion, and third place went to HKEX with $13.9 billion. It raised $74.4 billion through 275 traditional and SPAC issuances for the first quarter of 2021, a record-high rate of 275 issuances.

A record $49.3 billion was raised from initial share offerings by Asian companies, according to Bloomberg. This marked a surge of 154% over the amount raised in the first quarter of 2020.

The bond market predicts more mergers and acquisitions

Most of the proceeds ($789 billion) of debt markets in Q1 were refinanced, but M&A proceeds accounted for a significant increase. The Federal Reserve has indicated that it will not raise rates this year and has a patient stance on rate increases. While the market reacted to the recent rise in the 10-year Treasury yield, other factors such as inflation and growth in the economy will have a greater influence on markets going forward. With private equity firms deploying their dry powder, we expect leveraged loan volume to increase, primarily through LBO issuances.

Attacks by SPAC continue: Facts & Figures

  • There were 91 traditional IPOs in the last three quarters, raising $38 billion in all.

  • Almost all SPAC IPOs raised a total of $87 billion, which is more than triple the amount raised during the entire second half of 2020. 24 SPAC mergers have already been completed in 2019.

  • In a single quarter, both traditional and SPAC IPOs raised record amounts and proceeds.

  • A total of 34 pharma and life sciences IPOs, excluding SPACs, raised $7 billion in Q1. 28 tech IPOs raised $21 billion, including one that raised over $4 billion.

  • Results: In the first quarter, SPAC returns were 27%, outperforming most IPO returns. Traditional IPOs were 15%. This confirms that both SPAC and IPO returns outperformed the S&P by 6%.

Exhibit 2

Growing economic activity leads to strong bond market activity.

  • Despite the economic slowdown and negative news surrounding an impending vaccine rollout, the US bond market experienced another strong quarterly performance. The rollout of the COVID-19 vaccine and fiscal stimulus measures helped encourage borrowers to access capital.

  • An overall balance of supply and demand for investment-grade securities was evident in the $422 billion market, particularly for bonds used to refinance transactions.

  • In Q1 2021, high-yield bonds were issued $152 billion. This is up $80 billion from Q1 2020.

  • Leveraged loan issuance came in at $215 billion, a noticeable increase over Q1 2020 when the market was at $129 billion. LBO deals increased by 64% on a relative basis.

  • A slight increase in yields happened in the first quarter following an 83-basis-point rise in the 10-year Treasury at the beginning of the year. This is likely due to market participants continuing to factor in inflationary pressures and economic growth.

A perfect storm of uncertainty could occur in Q2 2021, triggering market volatility.

Even though the sentiment is positive, uncertainties are continuing to weigh, causing market volatility. COVID-19 is highly likely to recur around the world, causing a perfect storm of potential threats, including a waning global vaccination campaign, geopolitical tensions, inflation, interest rates, and the ability to withstand the impact of unexpected market shocks. It is imperative that well-prepared companies in popular sectors and with compelling stories jump on the IPO bandwagon while it is still open in order to capture the transaction window.

Source: Securities & Exchange Commission (SEC)

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