Tepid IPO Market Shows Little Sign of Strengthening Heading Into 2024

Stock market volatility, rising interest rates, and balance-sheet losses roiling the banking sector kept the market for initial public offerings (IPOs) chilly this year, and it shows little signs of warming in 2024.

As of Dec. 19, 108 companies have priced IPOs in U.S. markets, a 52% increase from the same time last year. That's the third-fewest in the past decade and 73% lower than the record highs of two years ago.

Likewise, IPO proceeds for listings with a market capitalization of at least $50 million rose to $19.4 billion, up from $7.7 billion in 2022—but that represents an 86% plunge from $142.4 billion in the same period in 2021.

Javier Avalos, co-founder and CEO of Caplight, which tracks trading in shares of private companies that comprise the breeding ground for IPOs, said it doesn't appear the market will thaw soon.

"The pre-IPO market is not really expecting a flurry of IPO activity in early 2024," Avalos said, adding that most investment banks have mostly clear IPO calendars in the first half of the new year.

Fed Rate Hikes Shut Off IPO Spigot

U.S. IPOs plunged in 2022 amid surging interest rates as the Federal Reserve embarked on its campaign to fight the worst inflation in four decades. Higher interest rates, of course, not only raise borrowing costs for fledgling firms but also provide more competition for prospective investors' cash.

Stock issuance has yet to recover, particularly after the special purpose acquisition company (SPAC) craze—which drove IPO proceeds in 2020 and 2021 higher than the previous five years combined—fizzled.

Moreover, companies that have gone public this year have struggled to capture investors' interest: Even as shares of artificial intelligence (AI) chip designer Arm Holdings PLC rose 25% on their first day of trading in September in the largest IPO in two years, recent third-quarter IPOs posted an aggregate net loss of 32%.

Arm's $5.2 billion IPO was by far the largest year-to-date. Shares of shoemaker Birkenstock Holding PLC have surged more than 20% since their early October IPO.

But several other high-profile offerings have floundered.

Online grocery shopping service Instacart (Maplebear Inc.) went public in September, but its shares have lost a quarter of their value since then.

Shares of software platform provider Klaviyo also went public in September, losing a quarter of their value in their first six weeks of trading before rebounding in November. They remain 15% down from their IPO.

Private Market Action Doesn't Signal IPO Rebound—Yet

Pitchbook Data, an analytics firm specializing in the private equity and venture capital markets, said the slowdown since early 2022 has created a backlog of venture-capital-backed firms awaiting a public offering.

That backlog of about 220 companies means that when more ideal financial market conditions exist, "there could be a rush to list by companies looking to take advantage of the shifting market," Pitchbook said

However, Avalos said Caplight's trading platform currently has more private shares posted for sale than for purchase—a sign that doesn't bode well for an IPO market rebound.

Investors, Avalos said, often seek to buy shares of private firms when they expect those firms to go public, offering them a chance to exit their position at an attractive profit. Now, generative AI firms Open AI and Cohere account for two of the three companies with the most sought-after private market shares.

"That's a material portion of the demand right now," he said, "and they're not IPO candidates."

Neither is SpaceX, Avalos said, which commands the most demand among private companies at present, primarily because investors expect the firm to make another tender offer soon.

Not Completely Frozen

Pitchbook notes some IPO candidates may simply have to reset their expectations or continue waiting.

"Now, while profits are at a premium and less-risky investments are delivering high yield, many private companies are left in a bind and likely looking at a lower-valuation exit," the firm's outlook said.

Still, Avalos said some 2024 IPO candidates do exist. Online car rental firm Turo has experienced strong demand in the pre-IPO market, and it has attracted almost $500 million in funding to date.

China-based online fashion company Shein filed for a U.S. IPO in late Novemnber. Some reports have suggested it will seek up to $90 billion whenever it launches share sales, though it will have to overcome questions about allegations of forced labor in its supply chain.

Published reports also indicate social media giant Reddit, which filed an IPO prospectus in 2021, may again consider raising up to $15 billion. Data analytics firm Databricks, with an estimated value of $43 billion, also remains a potential candidate. And digital payments processing company Stripe, which first took steps to go public two years ago, could seek up to $50 billion.