EY Equity Capital Markets Update - IPO market conditions continue to improve

With rising confidence in the IPO asset class, indicators suggest momentum from 1H 2024 carried over into the third quarter and beyond.

In brief

• The first half of 2024 represented an inflection point in the IPO market as deals came to market with greater frequency and consistency than in prior years.
• As issuers and investors continue to gain clarity on key issues, including interest rates, the US presidential election, and corporate earnings, we anticipate a greater willingness for buyers and sellers to transact.
• The US presidential election may tighten the IPO market window; however, there is evidence of a building 2025 pipeline.

The first half of 2024 may have represented an inflection point for the IPO market with the return of consistent and sustained deal activity

US equity capital markets experienced a strong start to 2024 with IPOs coming to market more frequently and at a more consistent pace than in the last few years. For context, through June 30, 37 IPOs priced raising over $17b of proceeds, relative to 20 IPOs and ~$10b in proceeds for the same period in 2023 (Table 1). In the same table, we also compared 2024 year-to-date activity with the first six-month average from 2010 to 2019. The first six months of the year during 2010–2019, representing a facsimile for more normalized IPO activity, averaged 76 IPOs raising approximately $23b in proceeds. While the number of transactions year-to-date in 2024 is about half the 2010–2019 average, proceeds are beginning to trend toward the normalized average, driven by a few large deals. While few would suggest 2024 has been a return to normalized IPO issuance activity, as noted the consistency of issuance and higher volumes suggest we may have hit an inflection point en route to more traditional levels of IPO issuance.

Table 1: While IPO deal activity remains below historical averages, a noticeable uptick is evident year-to-date

Source: Dealogic | Data as of June 30, 2024. Includes SEC registered offerings $30m+, excluding BDCs and SPACs.

Table 2: Constructive equity market backdrop

Table 3: Inflation has ‘stabilized’

Source: S&P Capital IQ | Data as of June 24, 2024

Consistent deal activity with constructive outcomes through the first half of 2024 have given issuers and investors a renewed sense of conviction around capital formation and the health of the IPO market. Evidence that the market can sustain a steady flow of IPOs on a weekly basis is an important psychological data point enhancing both investor and issuer confidence. As noted, activity is trending toward a pace closer to pre-COVID-19 historical averages, encouraging both supply and demand participation.

Table 4: Consistent flow of IPOs 2024 vs. 2023

Source: Dealogic | Data as of June 30, 2024. Includes SEC registered offerings $30m+, excluding BDCs and SPACs.

The 1H 2024 class of IPOs has significantly outperformed deals from prior years, providing outsized returns which in turn encourages participation in future transactions.

Table 5: 2024 IPOs are performing well on debut

Source: Capital IQ, Dealogic | Data as of June 30, 2024. Includes SEC registered offerings $30m+, excluding BDCs and SPACs.

This year’s IPO class has outperformed the market in after-market trading, providing investors with superior returns to the 2023 and 2022 IPO classes. Additionally, recent index gains are largely attributable to a handful of mega-cap technology companies that have disproportionately impacted US benchmark indices, suggesting IPOs have outperformed the average stock by even more. These returns should help keep investors engaged and encourage participation in the new issue market as we move through the second half of the year.

While traditional high-growth sectors have dominated IPO activity, year-to-date issuance has been more diversified than in recent years.

Table 6: Deals remain diversified across sectors

Source: Dealogic | Data as of June 30, 2024. Includes SEC registered offerings $30m+, excluding BDCs and SPACs.

Emerging from a volatile capital markets period, IPO investors have favored scale, profitability, cash flow and the capacity to sustain large transactions. While growth is always at a premium, investors in many cases have been attracted to the “safety” of scale and profitability vs. more speculative investments. As an example, we have witnessed increased deal flow from the consumer/retail and industrial sectors, often larger companies in sectors where valuations rebounded and, in many cases, surpassed historical levels, leading to increased IPO interest from both issuers and investors. This differs a bit from prior cycles, such as 2020–2021, where volumes were dominated by high-growth areas such as technology and biotech, with less activity across other sectors. Additionally, technology valuations still lag pre-COVID-19 and historical levels, continuing to delay transactions for many issuers in that sector.

US presidential elections can influence the pace of IPO issuance, but data suggests the impact is incremental and generally leads to increased deal activity in the post-election window

It is hard for issuers and investors to ignore the noise and uncertainty around substantial geopolitical events such as a US presidential election. The combination of disparate potential outcomes and uncertainty suggests that a volatile backdrop in the lead-up to these events may be inevitable. Banks and advisors traditionally call out the market window around elections as challenging, and guide issuers not to target or “count on” market access during that time. We concur with this sentiment and prudent approach.

However, data suggests that US presidential elections don’t have a particularly significant impact on deal activity. Table 7 shows that in the last three election years, second half IPO deals actually outpaced the year prior. And on a month-by-month basis, the only real divergence in election years appears to be limited to issuance in November. Some of the higher-than-expected activity in election years can be attributed to the spike in IPO deal activity in late 2020, but in some ways that activity also validates this observation — that US presidential elections do not really narrow the IPO window much.

Table 7: IPO activity in the second half of election years is fairly consistent

Source: Dealogic | Data as of June 30, 2024. Includes SEC registered offerings $30m+, excluding BDCs and SPACs.

The next question to consider: how is IPO activity impacted in the aftermath of elections? Obviously, election outcomes can influence market trajectory and capital markets activity, both positively and negatively. Also, the impact will likely be different across sectors. However, looking back over the past quarter century suggests 2025 should benefit from deal market tailwinds and host an uptick in IPOs. When looking at data from 2000 to 2024, a median of 161 IPOs priced the year following a US presidential election vs. a median of 122 IPOs priced in presidential election years, an increase of over 30%. This uptick could be influenced by a number of factors, including markets on average encouraged by the outcomes, deal timelines pushed due to compressed 4Q election year windows, as well as the removal of political “uncertainty” post-election. Frankly, there could also be a bit of randomness in the data. Either way, there is enough information in the market to suggest that 2025 is poised to be a more active year in the IPO deal market.

Table 8: Years following presidential elections tend to see an uptick in IPO activity

Source: Dealogic | Data as of June 30, 2024. Includes SEC registered offerings $30m+, excluding BDCs and SPACs from 2000 – 2024. | “Other” years between 2000 – 2024 that were not election years or 1-year post election.

H2 2024 IPO market outlook 

Looking ahead to 2H 2024, issuers and investors will continue to gain clarity on key considerations, including the path and trajectory of interest rate cuts, the outcome of major elections and geopolitical events, and updated corporate earnings that could encourage IPO market participation. Expectations around rate cuts currently are fairly measured, which has in some ways made equity market participation less speculative and a bit more stable. Anticipated valuations continue to consume board-level strategic planning, transaction timelines and execution tactics. Many tangible and intangible factors are trending positively, which suggests activity is likely to continue at a measured pace. 

An additional theme to monitor in the coming months is whether large private equity firms with expansive portfolios will bring assets to market in a material way. These owners/issuers are typically a large segment of the IPO calendar and have largely been dormant due to a variety of factors, including valuation, the cost of debt, asset operating performance and broader market conditions. With a number of these issues trending positively, PE portfolio assets might come to market more frequently, which would be a significant supplement to deal flow. 

Regarding other themes to watch for as we move through the year, AI-related products and services continue to dominate investor dialogue. Several of the largest IPOs this year have been AI-related, including a company that designs technology and solutions for AI infrastructure and a social media platform. Additionally, a biotech focused on providing AI-enabled precision medicine priced an IPO.

These deals collectively mark the beginning of what is likely a multiyear trend and a new sweet spot for IPO investors. Important to note: Investors are becoming more familiar with the tactic of using AI terminology in registration statements to garner favor. Rather, some companies are technology or tech-enabled and utilize AI, which may not fit an investor’s criteria of being a pure-play ”AI investment.” If issuers pursue “AI branding,” it will become increasingly important for them to prove out their business case, exhibit differentiation from peers, and convince investors that they have a “must own” asset that provides the buy side with AI upside.  

More broadly, investors are still somewhat reserved after the IPO downturn of recent years and are likely to remain disciplined and discerning around deal participation. They continue to seek quality companies, compelling valuations, and established businesses with scale and profitability. A few additional themes that may impact US IPO deal activity include the following: 

• As interest rate cuts commence, investors could shift focus toward growth stories at reasonable valuations. 
• US capital markets generally provide incremental stability relative to local exchanges. This, coupled with increased liquidity and ready access to growth capital, could lead more international businesses exploring the IPO markets to list in the US market. 39% of IPOs on US exchanges in 2023 were from foreign domiciled issuers, a very elevated number relative to historical data. While that percentage might skew higher due to low IPO numbers in general, the trend of international companies accessing US markets is indicative and likely to sustain. 

In summary, continued momentum for US IPOs will largely depend on stabilized equity markets, improving valuations, with volatility and geopolitical unrest remaining in check. Interest rate policy and outlook will likely also figure prominently into market tone, which in turn encourages IPO deal flow. Continued macro momentum coupled with businesses demonstrating predictable and consistent performance should help the IPO market build on the strength of the last few quarters.  

The IPO pipeline has been building steadily over the past two years  

Over the past two years, quality companies have been forced to rely on tight private capital markets and operational initiatives to wait out the IPO downturn and fund their businesses. This has created a healthy backlog of private companies across all sectors currently navigating the SEC registration process. While many of these companies are focused on 2025 debuts for a variety of reasons, some have targeted the near term to list. July has already been witness to a number of multibillion-dollar valuation issuers, including a cold storage REIT, a FinTech software platform, a hospital operator, and an automotive data provider. As noted throughout this report, we expect the IPO pipeline to continue to build and activity to remain consistent, with an uptick in 2025.