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Nine factors that could drive the IPO market in 2025


Recent financial, economic and political developments have sparked excitement for accelerated IPO activity in 2025 and beyond.


In brief

  • Despite subdued IPO activity in recent years, 2024 saw more IPOs and proceeds raised than the prior two years, and strong aftermarket results.
  • Organizations planning to IPO should review their readiness plans to be prepared to respond quickly to favorable market conditions.

The IPO market has seen dramatic shifts over the past few years with a remarkable boom in 2021, a sharp downturn in 2022, and a slow-but-steady recovery in 2023 and 2024. As we enter 2025, we are following three years of constrained IPO activity levels relative to historical averages, both in terms of the number IPOs and the amount of IPO proceeds raised.

Following challenging conditions over the past few years with inflation spiking and interest rates rising, today’s stronger economic conditions and strengthening investor conviction are driving optimism for greater IPO activity moving forward. As companies contemplate a potential public listing, it is critical to objectively assess the current market backdrop and the outlook for the future.

The post-pandemic IPO market

Despite the impacts of the COVID-19 pandemic, we experienced the most active year in two decades for IPO issuance in 2021 on the back of record valuations and highly attractive supply and demand dynamics for capital formation. However, 2022 and 2023 were marked by an increasing interest rate environment, falling valuations and fears of a recession — all of which led to a dramatic reduction in new issuance activity. As a result, 2022 and 2023 saw the weakest IPO market since the global financial crisis. However, as the interest rate cycle reversed in 2024, corporate earnings strengthened and valuations recovered, resulting in a more hospitable backdrop for IPOs. All in, 2024 showed pockets of strength and an upward trend in the IPO market, but IPO issuance remained well below the pre-2020 10-year average of $45 billion per year.

Chart 1

What to watch for in 2025 and beyond

Looking ahead, the IPO market is the subject of increased optimism for many reasons, including strong stock market valuations, a declining interest rate environment and solid performance by the “IPO class of 2024.” A healthy economy, investor confidence, the acceleration of the private equity and venture capital “flywheel” (i.e., more monetizations leading to more fundraising and more deployments, and eventually more monetizations), and predictions of a strengthening M&A environment further boost the outlook. Let’s take a look at the factors creating the optimism for the IPO market in 2025 and highlight what to watch for as the year unfolds.

1. Stock market valuations

The recovery in stock valuations makes a potential issuer’s peer set look more attractive and helps align IPO valuations with shareholder expectations. NASDAQ and the S&P 500 set 38 and 57 new record highs, respectively, in 2024. The NASDAQ’s price-to-earnings (P/E) ratio, based on the trailing 12 months (LTM) of data sourced from Bloomberg, reached 49.5x at the end of 2020, declined to 26.8x by the end of 2022 and has since rebounded to 40.5x as of the end of 2024. The performance of the S&P 500, with returns of 24% in 2023 and 23% in 2024, alongside the NASDAQ’s returns of 43% in 2023 and 29% in 2024, further exemplifies this recovery. As we look forward to 2025, stability in valuations will be more important to the IPO market than continuing to achieve outsized growth rates from here.

Chart 2

2. Interest rate environment

Following the recent peak in inflation in mid-2022 of over 9% and a series of interest rate hikes from mid-2022 to mid-2023, a more accommodating interest rate environment is poised to fuel the IPO market as lower rates reduce borrowing costs, stimulate investment in new ventures and reduce the discount rates applied to growth company valuations. EY-Parthenon currently projects a rate cut at every other meeting through the third quarter, for a total of 75 bps of easing in 2025.¹ Assuming inflation remains under control and the economy remains healthy, a continued reduction in interest rates could propel the IPO market in 2025 and beyond.

Chart 3

3. Performance of recent IPOs

The IPO class of 2024 generally priced constructively and traded well in the aftermarket, with over 85% of these IPOs pricing within or above their initial marketing price ranges. Overall, the 2024 IPO class rose over 20% from issuance through to year-end, with larger IPOs (i.e., in excess of $100 million), showing an aftermarket performance of nearly 30%.² When IPOs as an asset class perform well, investor demand for IPOs grows and further IPO issuance typically follows.

4. Economic stability

As the economy emerged from the pandemic, inflation began to rise and fears of a recession became pervasive in the narrative. Over the past few quarters, however, recessionary fears have significantly diminished as GDP growth forecasts for the US eclipsed 2% for 2025 and 2026, compared with a mid-2023 consensus GDP forecast for 2024 of just 0.7%, according to Bloomberg. As of the end of 2024, the probability of a recession in the following 12 months declined to 20%, down considerably from 65% at the end of 2022.³ With prospects for continued economic strength as a tailwind, the optimism for a more vibrant IPO market increases.

5. Broadening market recovery

The market recovery is beginning to extend beyond large tech companies, reaching various sectors and market segments. The Russell 2000 index, which contains many small and mid-cap growth companies, is nearing its 2021 highs, up 36% from September 2023 lows, and is nearing new record highs for the first time since late 2021. Since the IPO market is traditionally weighted toward growth-stage companies, broader-based interest in diverse capital investment across sectors and stages of development is critical for driving increased activity in the IPO market.

6. Investor sentiment and capital inflows

Investor confidence in US equities remains strong, attracting $176 billion in net inflows from mid-October to early December 2024, while the rest of the world saw less than $20 billion in net inflows.⁴ Hedge fund assets reached record highs of $4.5 trillion in October, highlighting the market’s liquidity and investor optimism.⁵ With capital to deploy and the IPO market “performing,” investors will be inclined to seek new investment opportunities from promising new companies.

7. Private equity and venture capital

Private equity (PE) and venture capital (VC) are poised to drive further IPO activity. In recent periods, PE IPO activity has been notably low, with PE-backed IPOs accounting for just 3% of the global IPO count in 2022, and an average of only 8% from 2022 to 2024, compared with an average of 22% over the decade prior to 2022.⁶ This has created a backlog of aging portfolio companies. In addition, the narrowing gap between private and public market valuations makes IPOs an attractive exit strategy for these institutional investors, signaling a robust pipeline of future offerings.

8. AI paradigm shift

The rapid adoption of generative AI and large language models (LLMs) is attracting significant capital, particularly in the private markets. Bloomberg forecasts that artificial intelligence (AI) and LLMs will generate $1.6 trillion in revenue by 2032, representing a 37% compound annual growth rate (CAGR) from $93 billion in 2023.  This growth is expected to be fueled by over $2 trillion in capital expenditures by 2032, according to Bloomberg forecasts. While the private markets have eagerly funded AI and LLMs to date, ultimately the public markets are better suited to finance the longer-term development and deployment of these technologies.

9. Strengthening M&A environment

M&A activity has seen a significant decline over the past few years, with the number of deals declining by 24% in 2022, 14% in 2023 and 12% in 2024 compared to prior years. However, the M&A environment is expected to become more accommodative under the new US presidential administration. As a result, companies should be able to scale quicker ahead of a public listing, and the ability to use public stock as acquisition currency becomes more attractive.

Chart 4

Kevin Tooke, Senior Manager, Americas IPO, SPAC, and Privates Advisory and Tristan Jones, Manager also contributed to this article.



Summary

The US IPO market grew robustly in 2024, with proceeds up 45% and the number of IPOs rising nearly 40% from the previous year. Life sciences and technology sectors led the way, with cross-border IPOs and sponsor-backed deals also rising, but overall activity remained below historical norms.

Looking ahead to 2025, optimism is high for accelerated IPO activity, supported by strong equity valuations, low volatility, declining interest rates and anticipated policy changes. IPO hopefuls should expedite their readiness plans to capitalize on a potentially more receptive market.


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