2020 is trending to surpass the peak tech bubble of 1999 as the biggest year for U.S-listed initial public offerings in history, with nearly $95 billion raised by IPOs through Sept. 23 (in ’99, companies raised $107.4 billion). More than 80% of the money has been invested in companies within the healthcare and technology sectors or into special purpose acquisition companies. RedBall Acquisition Corp. (RBAC) and Sports Entertainment Acquisition Corp. (which began trading under the ticker SEAH.U on Oct. 2) are among the newly formed SPACs that emerged this year (Bull Horn Holdings and Acies Acquisition Corp, both pre-IPO, are others that have announced their intent to invest within the sports arena). DraftKings (via a merger with Diamond Eagle Acquisition Corp. and SBTech), Hall of Fame Resort & Entertainment Co. (via a merger with Gordon Pointe Acquisition Corp.) and Golden Nugget Online Gaming are among the other sportscentric companies to have raised money in the public markets in ’20. fuboTV, Inc. (which merged with FaceBank Group) will join the collective when it IPOs on the NYSE under the symbol FUBO tomorrow (Oct. 8).
One would not think the midst of a recession would be an ideal time to raise money in the public markets. But Cresset Capital chief investment officer Jack Ablin says the valuation arbitrage between Wall Street and Main Street, brought on by the pandemic, helps to explain the flood of IPOs that has taken place this year. “While Wall Street has been thriving, Main Street has really suffered. And because most private businesses are pretty small, private equity tends to have more of a Main Street valuation. Companies seeing the private equity valuations at one level and the public equity valuations at another are realizing there is an opportunity to get a big bump by moving into the public markets.”
Our Take: Valuation multiples aside, the cost of funding is a lot cheaper for public companies (and thus another reason for late-stage startups to pursue an IPO). Ablin reminds: “The Federal Reserve has provided $3.5 trillion of liquidity so far helping most of these Wall Street firms borrow pretty easily. [By contrast], it’s far more difficult for privately-held companies to tap into the credit markets.”
It wasn’t long ago that late-stage startups shunned the public markets. Companies were finding success raising tremendous sums of private funding, so avoiding regulatory and shareholder-driven scrutiny was an easy decision. In 2016, companies raised less than $25 billion in IPOs.
The SEC has since tried to encourage companies to raise money from the public markets (see: direct listings). But as Jeff Harris (Gary Cohn Goldman Sachs endowed chair in finance at the Kogod School of Business at American University) explained, the strong correlation between the hot markets and the number of IPOs taking place has likely been just as big of a factor. “There tends to be hot and cold markets and people tend to think you can’t sell into a falling market—that if the markets begin to go down, the window of opportunity for raising funds goes away. So that has created a rush for companies to list while the markets are still going up.”
Coronavirus is likely another factor contributing to the number of IPOs filed this year. With many startups facing a liquidity crunch during the pandemic, many private equity and venture capital investors turned their focus inward, making it more difficult to raise money privately. Shelter-in-place orders and social distancing guidelines have also made face-to-face meetings and due diligence a challenge over the past six months and have helped push companies toward the public markets.
It’s reasonable to assume that the upcoming presidential election expedited the timeline for at least some of the companies that have listed or are scheduled to IPO over the next 30 days or so. If Biden and the Democrats sweep, the capital gains tax could rise from 20% to 39.6%. Assuming founders and investors intend to cash out the gains realized from their IPO and not just roll “their cost basis into the new security, they would want to do it at a lower tax rate,” Ablin explained. Harris added that elections bring uncertainty, and thus it behooves companies looking to go public “to do so [now] in a market where they know what is happening.”
That does not mean one should anticipate a fall-off in IPOs after Nov. 3. Ablin expects the IPO market to remain robust into 2021. “The depression/recession we’re feeling on Main Street is going to be protracted. In fact, layoffs are first starting to move up-scale now (see: Goldman Sachs) and as higher income households begin to cut back on spending, [private money is bound to become more difficult to come by],” he explained.
With private market valuations driving companies to turn public sooner, it is fair to wonder which late-stage startups within the sports ecosystem are candidates to accelerate their IPO plans (particularly when one considers all of the retail money in the market). Ablin says that privately held late-stage esports and gaming companies “would draw huge interest if they became public.” Epic Games (which raised $1.78 billion in new funding in August at a $17.3 billion valuation) and Discord (which raised $379.3 million) seem to be strong candidates. Meanwhile, Harris suspects that technology companies looking to play in the media rights space (like Caffeine, which raised $259 million through Series D) and merchandising platforms (like Fanatics) would be well-received by the current market. Other late-stage private companies within the sports ecosystem that could potentially look to the public markets sooner rather than later:
Series D:
The Athletic ($139.5 million raised to date)
SeatGeek ($160 million raised to date)
Whistle Sports ($141.2 million raised to date)
Whoop ($104.8 million raised to date)
Series E:
GOAT Group ($297.6 million raised to date)
Viagogo ($65 million raised to date)
Series Unknown:
Bodyarmour
Gametime ($41.5 million raised to date)
Sportradar ($99 million raised to date)
StockX ($160.2 million raised to date)