The initial public offering market is returning to form

The IPO market returned to some sort of normalcy last year, with 108 public offerings raising a combined $19.4 billion according to Renaissance Capital. While these figures are still well below historical norms, they represent a massive jump from 2022, when a mere 71 companies hit the public markets. It was also encouraging to see Renaissance’s IPO Index (which monitors offerings over the last few years) shoot up more than 50% in 2023. In fact, if you had told us at the beginning of 2023 that we would weather a global bank selloff, ever-present talks of recession, a hyper-concentrated stock market and escalating geopolitical tensions without the IPO market locking up, we would have been thrilled.

Last year’s crop was headlined by some notable success stories, including Instacart, Cava and Arm Holdings. But even these listings had some hair on them and were massively oversubscribed. We think the 2024 market is shaping up to be more numerous, diverse and successful overall, which should help bring the market back near pre-pandemic levels. Here’s why:

• Macro Inflation pressures are expected to ease throughout the year, and interest rates should reflect that fact. Other leading indicators of IPO activity are also turning green, including lower volatility and a falling 10-year Treasury yield, both of which are supportive of risk assets.
• Timing The pandemic saw historic levels of venture investment, including late in the process. In fact, companies raised two to three years’ worth of capital during the early stages of the pandemic alone. With that capital starting to run out, the door is opening for a fresh injection of cash.
• History IPO activity tends to be highly cyclical, tied to overall economic activity and equity markets. According to data from Roth MKM, activity took 14 months to normalize following the Dot.com bust and 18 months to normalize following the Great Recession. Today, we sit at around 12 months after the IPO disaster in 2022.

When we consider what types of IPOs are most likely to succeed, it comes down to profitability (or at least having a path to it). Investors have grown more valuation-sensitive and will likely prioritize companies that have been private a little longer and have a better track record than the 2020 class.

Tech will be well represented in 2024. Artificial intelligence (AI) will continue to be a hotbed of IPO candidates. This extends to AI-adjacent sectors, such as industrials, that house the firms building out the demanding infrastructure required. Software is another corner of the market with coveted tech companies finally managing to turn a profit. Historically, IPO candidates in tech have mostly been acquired by a bigger fish before hitting the public markets, but now, with tighter regulation, this could change. Energy has flattened out after a strong 2022 but could produce some solid names. Perhaps the most interesting sector is health care, as many of these names are capital-starved after underperforming in 2023. A solid first-quarter earnings season should produce many viable IPO candidates, perhaps related to growing focus areas with a robust pipeline, such as obesity-related products and devices. Over 50 next-generation anti-obesity assets are either in clinical development or have positive phase 3 data.

Investors holding record amounts of dry powder, corporate spin-off and cross-listing activity robust, and more than 1,200 “unicorns” (private companies worth $1 billion or more) sitting on the market make for a combustible situation for 2024. As that IPO activity is hugely momentum-driven, a single IPO pop could be the spark that ignites the flame. Biotech/health care, having been absent from the recent IPO rally, is an area to watch.