Busiest Q3 IPO season by deal count since 2000: Renaissance Capital

Renaissance IPO ETF Manager Kathleen Smith joins Yahoo Finance’s Zack Guzman to discuss the latest IPO outlook amid Palantir, Asana public debuts.

Video Transcript

ZACK GUZMAN: Right now, I want to highlight the newest entrant we have here, or at least the big name entrant we have here, in the New York Stock Exchange as project management software company Asana just recently opened in its first trade. We saw that trade happen at $27 a share here. 8.26 million shares trading at the open, giving the company a valuation north of $5 billion, and of course, it's the latest big tech company becoming public here. It's been a hot third quarter for IPOs. I know that this is a direct listing, but we'll loop them all together here at least when we look at how the action has been here in 2020.

Overall, in Q3, we saw 81 IPOs come out, raising $28.5 billion. It was the busiest third quarter by deal count since 2000. And here to join us to discuss that in terms of the trends we're seeing there is our next guest here, Kathleen Smith Renaissance IPO ETF Manager. And Kathleen, you guys give investors exposure to some of these names coming out through your ETF ticker IPO, up about 66% year-to-date while the market's been about flat. I mean, clearly, as the data shows, a lot of investors are coming after these IPOs, but what have you made of all the activity we've been seeing and the activity we're seeing now today with Asana coming out?

KATHLEEN SMITH: Sure, when investors make money in the already public IPOs, they're willing to come in and look at the new ones. So that ETF is a barometer of investor enthusiasm, and investors are very enthusiastic right now. It turned out that after the COVID shutdown, the kinds of stocks that are in the IPO markets, they tend to be new economy stocks, they're the digital types of companies, just became a favorite segment of the market. So investors are looking for these kinds of companies. They're looking for growth.

The very low interest rates that the Fed has kept us with is also really helping growth companies. So strong returns on IPOs already and low interest rates being in the right sweet spot. The segment of the market has helped to generate a huge amount of enthusiasm for IPOs. The new ones coming out, in fact, so much so that we're getting these like signs of what it looks like in '99, 2000 in terms of activity.

ZACK GUZMAN: Yeah, and that's fine, as long as you don't see the run up and then the complete falling off a cliff that you saw back in the tech boom back there in 2000. But when you look at some of these big movers, to your point, I mean, there was an emphasis when Zoom came out here, it was one of those rare IPOs. It was a company that was actually profitable, and we don't see a lot of those particularly in the tech space when they come out, but what does that maybe say about appetite here even in 2020 for companies that aren't profitable?

Of course, Asana would fall under that, but it's a direct listing. What you can get in a direct listings in a second. But Zoom's one of your guys' top holdings in the ETF, and it's had quite the run in all of this, so how do you assess maybe investor appetite for some of these riskier entities that have not yet proven a profit?

KATHLEEN SMITH: I think that if you're not going to be profitable, you better be growing fast. That's the formula, and investors do have to see that the company's moving toward profitability. But there are companies, even more than Zoom, that do come out and have profits. They may not, even when Zoom first came out, it wasn't the high profile company that it certainly is today. So there are others, for example, recently GoodRX, the price comparison web application, was a very profitable company. JFrog, a software developer of dating software, new software, an application, that company, JFrog, had a very nice profitable picture.

So there are these companies, and I think that it's worthwhile to try to focus on those, because yes, it is kind of exciting to see that really fast growing companies, but maybe, you know, there's markets where profits matter. McAfee, for example, is going to tap the IPO market with maybe a $2 billion deal. We just looked at the numbers there, and that's a profitable company. Doesn't have all the growth but certainly has profits.

ZACK GUZMAN: Yeah, it's an interesting mix here, and of course, when we're talking about Asana or Palantir coming out with direct listings today, I mean, it raises the question of maybe what are the best avenues to tap public markets, and we'll see how those go beyond day one. But when you look at the other major trend here, SPACs, what do you think about some of these big names-- DraftKings, Nikola, though it has its own worries right now, it does also seem to be a trend when you look at what happened in the third quarter, an unprecedented 75 blank check company is coming out raising $28 billion. I mean, what do you make of maybe these differing paths and how quickly it's changing in terms of private companies saying, look maybe we don't need to do the traditional roadshow and go through the IPO process anymore. How do you see that changing in Q4 and beyond?

KATHLEEN SMITH: We think the reason there's such high anxiety to find sort of other ways to get liquidity is that there's so many private companies that have remained private and that can't necessarily get the valuations they want or are attractive enough to go public in a regular way. So this is why we see a push for the alternatives. In the case of the SPAC, which I think given the momentum now, could end up being more capital raised this year than even the regular way IPO market.

It's just incredible how many are done. But by and large, the companies that are being purchased by SPACs are companies that are not able to go public in the regular way, or they would go public, we think. So it's just another avenue to take off the books. It's some illiquid investments that have been locked in the private market for longer than they should.

In the case of the direct listing, we think that it's an attempt to try to get to a better place, but the way in which they're trying is kind of tough on the buy side. So they, on the sell side, are saying, we want to do a deal that maximizes our price and enables us to sell as many shares as we can, even before we've reported earnings or any quarterly results. So typically, no lockup, which investors would have in a regular way IPO, because they want to hold off insider selling until they see a couple quarters of results to make sure that the company is performing. So the style, the manner in which the structure of the direct listing is, it's kind of, it's still being tried. I think that the regular way IPO is still going to end up proving out to be the better mode for investors.

ZACK GUZMAN: Yeah, just like jeans, you know? It's not a one size fits all, depends on the company. But the more examples we get here, Asana following, you know, Spotify and Slack, and seemingly, day one, don't want to get ahead of myself, but seems to be working, at least, in yet another instance. But Kathleen Smith, I appreciate you coming on to chat that, again, Renaissance IPO ETF Manager, thanks again.