In-person deal-making seems a vestige of the past, as lockdowns give rise to a new virtual process for companies to go public. Is it here to stay?
If necessity is the mother of invention, the coronavirus pandemic created a need like no other, as companies paved a new, faster, virtual path to going public this year. For many corporates, raising capital and shoring up their balance sheets has never been more important, despite the challenges to deal-making from lockdowns and the nearly universal remote work conditions that prevailed earlier in the spring—conditions that persist for many companies and employees around the world.
A lot of these companies are either beneficiaries of our changed world or somewhat immune. And investors are looking for opportunities suited for this environment.
To adapt, companies have embraced an expedited remote process to complete their initial public offerings. Pre-pandemic, a traditional roadshow and pricing of the IPO could take as long as two weeks and hinged on face-to-face interactions between management teams and prospective investors. The method that has emerged during the pandemic takes about half as long, with online investor meetings instead of time-consuming travel to far-flung cities for in-person gatherings in hotel conference rooms.
After public listings initially slowed during the spring, the market rebounded, as companies and investors adopted this new virtual process. Corporates aiming to recapitalize balance sheets in the wake of coronavirus are tapping public markets in alternative ways, too. Some are issuing convertible bonds, which give investors the option to convert their debt into equity shares, others are choosing special-purpose acquisition companies (SPACs), which raise capital from investors to purchase a target operating company, and certain companies are opting for direct listings, which allow existing shares to trade publicly on the stock market.
“It’s been an incredibly busy period of deal activity,” says Eddie Molloy, Managing Director and Co-Head of Equity Capital Markets, Americas, at Morgan Stanley. “A lot of these companies are either beneficiaries of our changed world or somewhat immune to how the world has changed. And investors are looking for opportunities that are well suited for this new environment.”
Many offerings this year were healthcare or tech IPOs, as COVID-19 has necessitated rapid public health solutions and digital technologies. Lockdowns have accelerated the demand for remote transactions and connections, while biotech companies that rely on capital to run clinical trials and develop drugs need cash, especially now, during the race for a coronavirus vaccine. Investors, meanwhile, are searching for winners in a new-normal environment.
Recent healthcare IPOs include Zentalis, which debuted publicly in April and Amwell, which went public in September, and in technology, the Zoominfo IPO and Warner Music Group IPO—tied to tech because of the growth of streaming music services—in June and BigCommerce IPO in August, all offerings that Morgan Stanley underwrote.
In remote IPOs, facilitating relationship-building between companies and investors requires extra care because of shortened timelines and the absence of in-person interactions, according to Ashley MacNeill, Head of Technology Equity Capital Markets at Morgan Stanley. “We’re spending more time educating investors about companies ahead of virtual roadshows,” when management teams present their stories and sales pitches to prospective shareholders, MacNeill says.
Yet, the virtual approach may offer some inherent advantages. Companies can more quickly identify “anchors” before the IPO. These cornerstone investors, who are the first to subscribe for shares, help instill confidence in the offering. Also, the lack of traveling means less fatigue for all parties, while allowing companies to prioritize investors in different cities in quick succession, shortening the roadshow process and reducing the time-risk factor of fluctuating markets that affects valuations and pricing.
Virtual meetings have created other unexpected benefits. For example, the ability for investors to see members of management in-situ at home offers a humanizing touchpoint, says Kalli Dircks, Executive Director in Healthcare Equity Capital Markets. “Getting to know management teams is a really important part of the process and it level-sets to see a CEO stuck at home, too—it’s a bit of an equalizer.”
As more and more virtual IPOs come to market, companies and investors are left wondering whether elements of the ad-hoc process might become permanent. Beyond the pandemic, it may be that shorter roadshows become the standard, as companies may opt to combine in-person meetings in key cities with online gatherings, according to Molloy. “At a minimum, the ability to work virtually should complement the historical in-person format,” he says. “It should mean the process will be more efficient on an ongoing basis.”