Are we in another tech bubble?

It’s a valid question, the tech sector has led the bull market over the last 10 years and many are surprised to see tech being the best performing sector during the pandemic. There are a combination of different factors happening simultaneously; there are strong fundamentals, companies are more mature and a structural shift of an acceleration towards tech nascent companies.

One critical difference is the types of companies we are seeing today versus those during the internet bubble in 2000. Companies coming to market today are backed by solid fundamentals whilst being more mature and established having remained private for longer with investors having moved earlier in the life cycle of companies. The average lifespan of a company that was going public in 2000 was 4 years and the average lifespan today is 12 years.

In Europe in 2010 there were 11 unicorns that number is now 315.

The high valuations of companies coming to market is partly justified by this maturity and in combination with optimistic outlook assumptions. Tech has been an attractive sector for investors with companies achieving larger scale and faster growth. We’ve seen huge success stories such as Google (Alphabet) and Facebook (Meta) which went public on high multiples and outperformed expectations and even more recently with disruptive companies such as Zoom and Airbnb resulting in the market willing to buy into higher valuations. To give you some statistics in Europe in 2010 there were 11 unicorns that number is now 315, and that’s probably old because that was from 2 weeks ago. Investor temperament has evolved to encourage companies to prioritise growth at the expense of near-term profitability, so long as there's some commitment to a visible path to turn EBITDA or Net Income profitable.

Acceleration towards tech nascent companies driving a structural shift

The pandemic has accelerated the digital transition whether it be through food delivery apps, ecommerce, online marketplaces, fintech or health tech. The acceleration towards tech nascent companies is a structural shift that was already underway where technology is playing an ever-increasing role in our day to day lives and in all aspects of life.

Of the de-SPACs completed Tech and Healthcare represented 60% having previously averaged one third in the prior 10 years.

This elevated investors already evident growth mindset where the technology sector outpaced all other industries representing a quarter of global IPO volumes in 2020. Similarly, given the focus on the vaccine development and drug discovery biotech companies represented 15% of global IPO volumes. This was also evident of the de-SPACs completed in the fast growth sectors of Tech and Healthcare representing 60% having previously averaged one third in the prior 10 years.

A combination of dynamics kept companies private for longer

We are going through a macro environment where rates are incredibly low. When rates are low investors are looking for yield and the money markets and bond markets are not offering it like they did 5 years ago. One of the repercussions are people have moved up the risk curve towards assets that yield more. Equities have been one beneficiary and we have seen that in the public markets and one of the other features we have seen is a move to earlier in the corporate life cycle. One of the ways we have seen that most pressingly is in the private markets with investors moving earlier in the life cycle of companies. The thesis is very simple, if public investors can get access the those privately before they go public, there is a premium that they can be rewarded. Late-stage private companies are a fantastic way to play a growth theme which is evident in the volume of capital flowing into continuation and growth funds combined with Venture Capital and Private Equity which resulted in companies staying private for longer. In addition, the acceleration in retail trading activity increased investor appetite for non-traditional and early-stage business.

The global surge of public listings

2020 was an extraordinary year with new records in global equity issuance surpassing $1 trillion for the first time and >$330 billion in global IPO volume. Within the IPO market we saw the rise of Special Purpose Acquisition Companies (SPACs) which made up more than 50% of US IPOs in 2020 raising $76 billion, reaching by far the highest number on record and was more than 3x any previous year. More recently we have seen a surge in tech and biotech companies coming to market following several years of constructive market conditions and increasing valuation multiples. This has been supported by a deep and broad investor base from institutional investors including mutual funds and hedge funds as well as sovereign wealth funds and an increasingly active retail community.

Percentage of Market Capital of Young Unprofitable Companies on the stock market has been increasing with c.80% of US IPO’s in 2020 having negative earnings.

One of the benefits of a lower volatility environment and constructive market conditions is that investors have more confidence. This sentiment is likely to remain high as long as the stock market continues to perform well. Despite a pandemic we have seen a robust equity market performance based on a combination of positive developments in vaccination programs, significant fiscal stimulus and continued low interest rates which provides credibility to the market’s expectation of continued momentum in the economy. Investors inherently are forward looking and able to see past short term economic weakness to a period of growth enabling them to value companies with relative confidence in the short-to-mid-term. Because of that they've been much more willing for companies to prioritise and pursue growth at the expense of near-term profitability, so long as there's some commitment to a visible path to turn EBITDA or Net Income profitable. This has been a theme seen in the percentage of Market Capital of YUC’s (Young Unprofitable Companies) on the stock market which has been increasing with c.80% of US IPO’s in 2020 having negative earnings.

Positive outlook, but not without risk

The IPO market is extremely sensitive to the equity market performance and if the market continues to perform well expect IPO activity to remain high. Fast growing and disruptive companies backed by solid fundamentals will continue to be attractive for investors with new issuance from tech oriented and biotech companies likely to dominate.

If the quality of companies going public deteriorates this poses a risk to the IPO market.

The risk here is that investor sentiment could diminish or turn negative should there be shocks to the economic outlook. This could be in the form of new Covid variants reducing confidence in vaccinations to facilitate an economic recovery or interest rates rising faster than expected both of which are clear risks in the current environment. Furthermore, if the quality of companies going public deteriorates this poses a risk to the IPO market.