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Stock Market Wall Street’s resident IPO expert breaks down the strategy behind her ETF that returned 107% last year, 3 risks to the current IPO boom — and 5 offerings to watch this year


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Stock Market Wall Street’s resident IPO expert breaks down the strategy behind her ETF that returned 107% last year, 3 risks to the current IPO boom — and 5 offerings to watch this year

Kathleen Smith, co-founder of Renaissance Capital Kathleen Smith This story is available exclusively to Insider subscribers. Become an Insider and start reading now. 2020 was a record year for US Initial Public Offerings, with 480 IPOs taking place. Renaissance Capital benefited from the boom with its US IPO ETF returning 107% to investors last year.…

Stock Market Wall Street’s resident IPO expert breaks down the strategy behind her ETF that returned 107% last year, 3 risks to the current IPO boom — and 5 offerings to watch this year

Stock Market

Stock Market Kathleen Smith, co-founder of Renaissance Capital

Kathleen Smith, co-founder of Renaissance Capital

Kathleen Smith


This story is available exclusively to Insider subscribers.
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  • 2020 was a record year for US Initial Public Offerings, with 480 IPOs taking place.
  • Renaissance Capital benefited from the boom with its US IPO ETF returning 107% to investors last year.
  • The firm’s co-founder breaks down the ETF’s strategy, the risks to the IPO boom and the offerings to watch this year.
  • Visit Business Insider’s homepage for more stories.

2020 brought a record high for initial public offerings in the US with 480 IPOs taking place, which is 20% higher than the previous record IPO year of 2000.

Benefiting from the boom is Renaissance Capital, a firm that provides IPO research and investing services. Its US IPO exchange-traded fund (IPO) returned 107% to investors in 2020, while the international version returned 51%.

“Since the second half of 2020, it was better than anything we’ve seen since 99/2000,” said Kathleen Smith, co-founder of Renaissance Capital. “Even this first month of the year, it’s more active than any time we’ve seen in history.”

The fund’s outperformance has been driven by biotech stocks, such as Moderna, and stay-at-home winners, such as Zoom, Smith said.

Many of the companies that went public in 2020 were growth companies, Smith said, so the “easy monetary policy” from the Federal Reserve has been beneficial.

“Low interest rates actually benefit growth companies because the present value of future growth is higher when the discount rate is so low and that’s why these low rates do help growth companies,” Smith said.

Even at times when monetary policy wasn’t so “easy”, the funds have performed well. Since inception, in 2013, the ETF has returned 18%.

Over the years, the strategy has remained the same, taking the market capitalization of all companies that have gone public over the last two years and investing in the top 80%. 

Rebalancing happens every quarter. However, the fund will buy some large IPOs sooner, usually after the stock has traded for at least a week.

The ETF takes the emotion out of investing, Smith said. The buy-and-hold philosophy means avoiding some of the market jitters that comes with investing in new companies.

Stock Market The IPO boom

The rise in IPOs in 2020 demonstrates a desire for liquidity from the private markets, Smith said.

“Fortunately, all the markets are wide open, you can tell by the returns on our products that the returns are the fuel that drive the IPO issuance engine and SPACs. If the returns are good, more happen,” Smith said.

Read more: This actively managed SPAC ETF amassed $60 million assets within a month of launching. Its founder breaks down how to pick blank-check firms — and shares 3 to watch in 2021.

Contributing to the boom are special purpose acquisition companies. A SPAC is formed by a group of investors with a strong background in a business sector, they raise funds from other investors and use this cash to acquire a private company with the aim of taking it public.

SPACs have been around for several years, but became more mainstream when top investors such as Bill Ackman and Chamath Palihapitiya got involved in 2020.

Stock Market Risks to the boom

Smith thinks 2021 will be another stellar year for companies going public. However, there are several risks she believes could limit momentum.

1) Market saturation

If there are more companies than the total addressable market could bear, this could create problems, especially if investors take a lax approach to allocating their money, Smith said.

“Companies that may not be as strong are going to come out and they won’t produce the returns investors are expecting, or the results that they’re expecting,” Smith said.

2) Interest rates

Low interest rates benefit the future cash flows of growth companies. Now we’re seeing the beginning of rising rates, Smith said, the question is how strong will rates be and how long will that take to impact the economy and how will that impact the market.

3) IPOs happening too quickly

Renaissance Capital provides research to institutions on IPOs. Right now, companies are filing, launching roadshows and pricing in a week, Smith said, which is not a lot of time to be studying this market.

Interest rates rising and market saturation will inevitably happen, Smith said, which will bring a whole new cycle.

Read more: Jeremy Grantham predicted the past 2 financial meltdowns. Now he says these 3 signals are foreshadowing a crash in another bubble being created by stocks and SPACs.

This new cycle might actually be the best time to buy, when the market is fearful and “everyone’s so darn nervous” because investors will get the best companies at the lowest valuations, Smith said.

Stock Market Offerings to watch

1) Bumble

The online dating service Bumble filed IPO paperwork on January 15.

“Bumble is a profitable company on a cash flow basis and it’s growing fast,” Smith said. “Investors are going to be interested in this.”

When evaluating future IPOs, Smith often looks to peers. In the case of Bumble, there are few peers, the most prominent is Match Group (MTCH).

“If it trades like the valuation of Match, that’s a $10 billion market cap,” Smith said.

2) Coinbase

At the time of the interview, Smith mentioned Coinbase, a digital currency exchange, was also on her radar as the firm had made a confidential filing and selected banks. It’s most recent round of funding came in at $8 billion, Smith said, which suggested the potential market capitalization of the IPO.

On January 28, Coinbase announced it would do a direct listing.

3) Compass Group

Compass, the real estate brokerage, is another company to watch. The most recent round of funding amounted to $6.4 billion, Smith said.

4) Robinhood

Robinhood, the online brokerage that has hit the news in the last couple of weeks, could also tap the IPO market this year, as its management have selected banks, Smith said.

The question is whether the firm will be creative, Smith thinks the firm could leverage their own network.

The biggest challenge for Smith is evaluating the potential size of the deal as Robinhood’s peers are all over the place. She said they are looking peers such as Charles Schwab (SCHW), Lemonade (LMND) and MarketAxess Holdings, (MKTX).

“So this one will be kind of interesting to figure out the valuation,” Smith said.

However, public scrutiny around Robinhood’s role in the GameStop and WallStreetBets saga could be a headwind for the potential IPO. Blind, an anonymous professional services network, surveyed 8,750 professionals and found 83% thought Robinhood had ruined its chances at a successful IPO.

5) Roblox

Online gaming platform Roblox was expected to go public in December, but has since shifted to the direct listing method. 

One of Roblox’s peers is Unity Software (U). Both firms have similar sales and very high growth margins, Smith said. Because they are close peers, there shouldn’t be too much disconnection.

“Investors are going to really look at this because, right now, I think they’ve got a potential $26/$27 billion valuation,” Smith said. “And that’s definitely going to be a candidate for inclusion in our products, as well as Bumble with that possible $10 billion, it will be a candidate to be included.”

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However, the Roblox direct listing might be on hold for a little bit longer, as the Securities and Exchange Commission is expected to review how the company recognizes revenue, according to Pitchbook.

“Billion dollar” companies

Smith also said several of what she calls “billion-dollar” companies will be coming public in the next few weeks:

  • Ortho Clinical, provider of vitro diagnostics products, which raised $1.3 billion.
  • LoanDepot, which sells lending products, is expected to raise around $1.5 billion, said Smith in the January 22 interview.
  • AtoTech, a chemical company, is expected to raise around $1 billion, Smith said.
  • Shoals, the solar technology company, already raised $1.9 billion.

Read more: An ETF provider whose specialty funds have smashed the market breaks down how to capitalize on the red-hot SPAC craze — and shares 4 to watch in 2021

Read more: This one feels a lot like 1999′ : An ex-Wall Street strategist breaks down why he is approaching the markets with a ‘tactically bullish’ strategy – and 3 pieces of advice on how to play a market set for a correction

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