By Wall Street’s enthusiasm for a potential rebound in the IPO market may be more indicative of analyst exuberance rather than the actual state of affairs.
The level of activity in the IPO market thus far this year is virtually identical to what was observed in the same period of early 2022 and 2023, both of which were marked by slow IPO activity due to the 2008 Global Financial Crisis. Renaissance Technologies reports that only four IPOs have been launched through January 23, the same number as the previous year.
There is no significant increase in the IPO pipeline either. Thirteen companies have filed their IPO paperwork so far this year, which reflects a 13.3% decrease compared to the same period last year.
It is important to note that the year is still in its nascent stages, and there remains a possibility of a substantial rebound in the IPO market in the coming months. However, analysts are jumping ahead by declaring that the market is undergoing a “revival,” a term frequently used in news stories covering the IPO market.
Moreover, the volume of IPOs is strongly influenced by the overall trend of the stock market. Therefore, Wall Street’s excitement about a robust IPO trend ultimately reflects optimism in the continuation of the bull market throughout 2024. While this optimism may turn out to be well-founded, it is worth noting that market timing predictions are abundant and seldom cause for extraordinary celebration.
In addition to the cyclical factors that impact IPO volume, it is important to consider several longer-term secular trends highlighted by Jay Ritter, a finance professor at the University of Florida and an esteemed expert on new issue markets. Ritter specifically mentions three noteworthy trends.
Startups are Delaying IPOs
The trend of startups waiting longer to go public has been developing for several years now. This shift began when startups found it increasingly easy to access private capital. According to the 2023 Pitchbook/NVCA annual yearbook, the amount of venture capital raised skyrocketed from $22-25 billion per year in the 2011-2013 period to $155-163 billion per year in the 2021-2022 period. As a result, this trend is unlikely to change anytime soon. Adding to this, there is currently a significant amount of unspent cash or “dry powder” among venture capital and private equity funds, leaving them eager to invest.
Alternative Exit Strategies
Previously, the standard exit strategy for startups was to go public. However, since the burst of the tech bubble in 2000, over 80% of successful exits have been through acquisitions. This shift in exit strategies is anticipated to continue in the foreseeable future.
Rise of Foreign IPOs in the U.S.
One positive development is the increasing share of U.S. IPOs coming from foreign companies. Contrary to predictions that stringent legal and regulatory requirements would dissuade foreign companies from using U.S. markets for raising capital, the data indicates otherwise.
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