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Long-awaited IPO Revival Depends on Bull Market Survival

January 25, 2024
minute read

Wall Street's current enthusiasm for a potential revival in the IPO market may be more indicative of analysts' exuberance than a reflection of the actual market dynamics.

The activity in the IPO market in the early part of this year mirrors that of 2022 and 2023, both of which were characterized by sluggish IPO activity, marking the slowest periods since the 2008 Global Financial Crisis. According to data from Renaissance Technologies, a mere four IPOs have materialized so far in the year through January 23, a figure identical to the corresponding period in the previous year.

Furthermore, there is little evidence to suggest that the IPO pipeline is experiencing a significant surge. With only thirteen IPOs filing their paperwork in the initial weeks of the year, as reported by Renaissance Technologies, this represents a 13.3% decrease compared to the same period a year ago.

While the year is still in its early stages, and there remains the possibility of a substantial rebound in the IPO market in the coming months, analysts may be premature in declaring a "revival," a term that has cropped up in numerous news stories about the current state of the IPO market.

It is essential to note that the excitement surrounding the IPO market on Wall Street is closely tied to the overall direction of the stock market. The optimism regarding a robust IPO trend essentially hinges on the belief that the bull market will persist throughout 2024. While this optimism may ultimately prove justified, making market timing judgments is a common occurrence and rarely warrants special celebration.

Aside from the usual cyclical factors influencing IPO volume, there are also longer-term secular trends that merit attention, as highlighted by Jay Ritter, a finance professor at the University of Florida and a leading expert on the new issue market. Three notable trends include:

  1. Delayed IPOs for Startups: The trend of startups waiting longer to go public has been ongoing for several years, fueled by their easy access to private capital. Ritter anticipates that this trend is unlikely to reverse, given the substantial increase in venture capital funds raised annually—from $22-25 billion in the 2011-2013 period to $155-163 billion in 2021-2022, according to the 2023 Pitchbook/NVCA annual yearbook. Additionally, there is a current record level of "dry powder" among venture capital and private equity funds, representing unspent cash eager for investment.
  2. Diversification of Exit Strategies: Going public is no longer the sole exit strategy for startups. Since the tech bubble burst in 2000, more than 80% of successful exits have occurred through acquisitions rather than IPOs. Ritter sees no indication of a reversal in this trend in the foreseeable future.
  3. Increasing Foreign Company Participation: A positive development is the rising share of U.S. IPOs originating from foreign companies, as demonstrated by data from Ritter. Contrary to predictions that stringent legal and regulatory requirements might dissuade foreign companies, this trend suggests continued interest in using U.S. markets to raise capital.

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Bryan Curtis
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Eric Ng
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