The recent pivot by the Federal Reserve towards interest-rate cuts has injected optimism into the market, prompting expectations of a quicker revival in initial public offerings (IPOs). The positive response, characterized by surging stocks and falling bond yields, follows the Fed’s projection of additional rate cuts in the coming year, accompanied by Chair Jerome Powell’s alignment with Wall Street’s dovish sentiment. This development is particularly encouraging for capital-intensive sectors like technology and healthcare, as well as the IPO market seeking to overcome a stagnant two-year period.
The equity rally, expanding beyond the Magnificent Seven tech stocks, has led to the S&P 500 Index nearing a new record, with the Nasdaq 100 Index and Dow Jones Industrial Average already achieving milestones. Mark Schwartz, Ernst & Young’s Americas IPO and SPAC advisory leader, notes that the valuation multiples are improving, and the “shadow IPO pipeline” – companies preparing for IPOs – has seen significant growth in the past seven quarters.
Schwartz stated in an interview, “The number of companies that were on the fence about getting serious about IPO preparation, they’re jumping over the fence in the last couple of weeks.”
While the exact timing of a substantial increase in IPO activity remains uncertain, factors such as declines in the Fed funds rate, forecasted to drop by 75 basis points next year, and seasonal considerations will play a role. Historically, the first quarter has seen lower average proceeds from US IPOs, with the bulk of funds raised occurring from April through June.
US elections present an additional timing risk, with Schwartz mentioning, “So the conversations are a little bit divided as to who can target pre-summer and who’s thinking about 2025.”
Despite the Arm Holdings Plc IPO in September falling short of reigniting the market as anticipated, bankers express cautious optimism for larger IPOs returning in the upcoming year. The challenging 2021, marked by a more than 90% drop in funds raised compared to the previous year, is being offset by stabilized fundamentals, improved risk appetite, and declining interest rates, fostering hope for heightened IPO activity.
Josh Weismer, Head of Equity Capital Markets for Mizuho Americas, commented, “The Fed pivot likely pulls forward IPO issuance earlier into 2024,” anticipating increased deal activity in the second quarter. Factors like a stronger demand for shares in secondary markets and a relatively calm Cboe Volatility Index contribute to an optimistic environment for IPOs.
However, challenges persist, particularly the gap in perceptions between private firms’ sponsors and management and what public investors are willing to pay for shares. While this gap has been narrowing, the timing of companies making the leap to public exchanges remains uncertain.
Amid varying perspectives, G Squared founder Larry Aschebrook offers a more cautious outlook, citing geopolitical uncertainty and upcoming elections in 2024 as potential headwinds. Aschebrook suggests a window opening between Thanksgiving and Christmas in 2024, with increased activity expected in 2025.
