What’s Behind the Record Level of Equity Issuance?

Episode Summary

Executive Summary: Goldman Sachs’ Benny Adler says Q1 2021 saw unprecedented equity supply from IPOs, SPACs, lockups, and block deals, forcing investors to fund new issuance by selling existing growth stocks. He argues the rotation is driven by supply, rising rates, and reopening, but remains constructive on equities overall given strong growth, low rates, and attractive valuations.

Main Topics: Record equity issuance and IPO/SPAC surge (Priority: 5/5): The discussion centers on the extraordinary amount of capital raised in Q1 2021, especially in traditional IPOs and SPACs, which Adler describes as a historic acceleration in equity issuance. Sources of hidden supply: lockups, de-SPACs, and block trades (Priority: 5/5): Beyond headline IPO numbers, the transcript highlights additional supply from expiring IPO lockups, de-SPAC share releases, PIPE-related selling, and elevated block activity, all adding pressure to markets. Investor funding constraints and rotation out of growth (Priority: 5/5): Adler explains that with cash balances low, investors must fund new issuance by reallocating portfolios, especially away from growth sectors that have led markets for years. Growth stocks under pressure from rates and reopening (Priority: 4/5): He links the sharp underperformance of growth versus value to a combination of rising interest rates, a cyclical reopening rotation, and concentrated issuance in growth-oriented sectors. Bubble concerns versus systemic risk (Priority: 4/5): Addressing parallels to the dot-com era, Adler says there is froth in pockets but believes the current cycle is far less systemic and is self-correcting before becoming broad market instability. Constructive outlook on broader equities (Priority: 5/5): Despite short-term volatility, Adler is bullish on the overall market because U.S. growth is strong, rates remain low by historical standards, and equity valuations appear reasonable relative to yields. Evolution of capital markets (Priority: 3/5): He notes that companies now have multiple paths to go public—IPO, direct listing, SPAC, hybrid structures—marking a major change in how public equity markets function.

Key Arguments: Q1 2021 saw an unprecedented wave of equity supply, with $250B+ of registered equity paper hitting U.S. markets. The supply shock was amplified by less visible sources such as lockup expirations, de-SPAC share unlocks, and block selling. Mutual fund cash is near record lows, so new issuance must be funded largely by selling existing equities rather than from idle cash. Growth stocks have been hit hardest because supply is concentrated in growth sectors, rates have risen, and investors are rotating toward reopening/cyclical names. The growth/value gap moved sharply: growth underperformed value by 25% in roughly six to seven weeks, after outperforming by 50% from Jan. 2020 to February. While there are pockets of froth, Adler believes they are correcting quickly and are not comparable to the systemic excesses of 1999-2000. The broader equity market remains attractive because economic growth is expected to be strong while rates are still historically low. A consistent, customer-first approach in capital markets—especially building strong shareholder bases—matters more than timing market mood swings. Capital markets are evolving quickly, with more funding and listing options than in the past, giving issuers greater flexibility.

Data Points: Registered equity paper in U.S. in Q1 2021: Just over $250 billion - Total headline equity issuance discussed at the start of the interview Operating company IPOs in Q1 2021: $40 billion - Traditional IPO volume for the quarter Average annual operating company IPOs over last decade: $51 billion - Used as a comparison to show Q1’s pace was extraordinary SPAC IPO proceeds in Q1 2021: $95 billion - SPAC issuance in the quarter SPAC IPO proceeds in full-year 2020: $83 billion - Q1 2021 already exceeded the entire prior year SPAC IPO proceeds over last five years: $117 billion - Shows how unusual the quarter’s SPAC activity was 2020 U.S. IPO volume: $84 billion - Referenced as the second-busiest year on record Typical IPO lockup period: 3 to 6 months - Explains why shares from 2020 IPOs started to hit the market in Q1 2021 SPAC dry powder: A bit over $100 billion - Capital seeking targets that can later translate into larger share supply Mutual fund cash balances: Below 2% - Described as the lowest level on record, limiting dry powder for new issuance Growth vs. value performance over 6-7 weeks: Growth underperformed value by 25% - Illustrates the sharp rotation away from growth Growth vs. value performance from Jan. 2020 to February 2021 peak: Growth outperformed value by 50% - Shows how dramatic the reversal has been Expected U.S. economic growth in 2021: Over 6% - Part of the bullish macro case for equities Interest rates: 1.7% - Used to argue rates remain historically low despite recent moves higher Last time U.S. growth exceeded 6%: 1984 - Historical comparison for the current macro environment Interest rates in 1984 comparison: 13% - Highlights how different today’s valuation backdrop is Stock valuation percentile on Fed model: 40th percentile - Indicates equities are relatively cheap by the earnings yield vs. risk-free rate framework IPO count at Goldman Sachs open: Close to 400 - Shows the scale of IPO execution experience referenced near the end

Pivotal Quotes: "I really described the whole last 12 months as a profound reallocation of capital throughout our economy that's largely flowed through equity capital markets." — Benny Adler: Explaining the macro backdrop behind the surge in issuance "This market has just been asked to digest a truly unprecedented amount of equity supply." — Benny Adler: Summarizing why equity markets have been under pressure from new issuance "I find myself as bullish and constructive as I've been at any time in my 21-year career." — Benny Adler: His overarching view on the broader equity market despite pockets of froth

Implications: Expect continued volatility in growth stocks as supply remains heavy, but the broader market may stay supported by strong growth and low rates. Issuers have more financing options, while investors need to be selective and prepared for ongoing rotation.