ETF Edge

Two factors are driving this year's 'avalanche' of IPOs, Renaissance Capital co-founder says ahead of Airbnb, DoorDash debuts

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Initial public offerings are having another banner year.

With Airbnb and DoorDash raising their IPO price ranges ahead of their debuts this week, the market's appetite for public debuts is higher than it's been in years, Renaissance Capital's Kathleen Smith told CNBC's "ETF Edge" on Monday.

"We've just seen a rush of IPOs, an avalanche — more billion-dollar IPOs this year than we've seen in any other year in history," said Smith, her firm's chairman and co-founder.

Renaissance Capital runs the popular IPO ETF (IPO), which is up over 110% this year and has gathered over $500 million in assets under management.

So far this year, 194 IPO deals have raised some $67 billion, the best yearly gain since 2014. Three more billion-dollar debuts are scheduled to hit the market before the end of 2020: Roblox, Affirm and Wish.

Two key catalysts are driving these returns, Smith said.

"We have a low interest rate environment that is very good for growth stocks, which tend to be the major constituents in the IPO market. But also, we have the Covid situation, which really accelerated the move toward the digital economy and toward vaccines," Smith said.

"Those two things have really accelerated the returns, and the returns also are the fuel that drive the IPO issuance engine," she said. "So, it's been very good for the returns on the ETF and we expect to see more opportunity with Airbnb and DoorDash."

The IPO ETF will add Airbnb and DoorDash shares to its holdings sometime after each stock has traded for five days, but before the fund's rebalancing on Dec. 18, Smith said.

"With [the] cutting edge comes the opportunity to get cut."
Dave Nadig
ETF Trends

Another group helping private companies go public has also had a big year: SPACs, or special purpose acquisition vehicles, effectively pools of funds that allow for quicker public market entry.

Companies that went public through SPACs such as DraftKings and Virgin Galactic piqued Wall Street's interest in recent years, with 200 SPACs raising about $64 billion so far in 2020.

That's partially because companies entering the market via SPACs are improving in quality, Paul Dellaquila, president and global head of ETFs at Defiance, said in the same "ETF Edge" interview.

It's also "about the quality of the management teams that are actually sponsoring SPACs," he said. "Bill Ackman is clearly the $4 billion gorilla that everyone talks about, but you're also seeing traditional private equity leaders really step into this space like TPG, Goldman Sachs, and that's showing a very strong commitment for 2021 for future growth."

That should bring SPACs a degree of credibility after years of flying under the radar, Dellaquila said, adding that before 2017, the most recognizable use of a SPAC was when Burger King's former backers used it to bring the stock back to the public markets in 2012.

There may be a reason to proceed with caution with both IPOs and SPACs, Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database, said in the same interview.

"It's hard to argue with the returns we've seen. But with those potential excess returns come, obviously, enormous risks," Nadig said. "If you look at what's coming to market through SPACs, you're not seeing ... a lot of utility companies come to market this way. What you're seeing is internet companies, technology companies, biotech companies, firms that are out there on the cutting edge, and with that cutting edge comes the opportunity to get cut."

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