The initial public offering (IPO) market in the United States is experiencing a challenging phase in 2024. Despite expectations of a revival, the number of IPOs remains low. This situation raises questions about the underlying causes and potential shifts in the IPO landscape. The dynamics in financial markets are constantly evolving, and the current situation may have broader implications for investors and companies considering going public. Observers are keenly watching for any signs of resurgence as the year progresses, hoping for a break in this downward trend.
What are the Recent Trends in IPO Activity?
In 2024, the U.S. IPO market is projected to slightly surpass the previous year’s low of 154 IPOs, with only 151 listings recorded thus far. The dramatic decline from 2021, when a record 1,035 IPOs were made, remains significant. The initial enthusiasm surrounding Reddit’s March IPO, which investors hoped would rejuvenate the market, has not translated into sustained momentum. Financial expert Jay Ritter had previously warned against expectations of an IPO boom, highlighting the singularity of Reddit’s broad retail appeal compared to traditional business-to-business companies lacking such brand recognition.
What Factors are Affecting the IPO Market?
Despite strong stock market performance, the IPO market struggles with stagnant activity. Ritter expressed surprise at the limited number of IPOs given the bullish market conditions. One factor behind the reluctance to go public is the inherent changes in the IPO structure. Unlike in 1980, when nearly nine in ten IPOs were profitable, recent years have seen only about three in ten companies turning a profit through IPOs. Moreover, the prevalence of dual-class shares has risen dramatically, offering specific shareholders enhanced voting power and making IPOs more attractive to institutional investors than retail ones.
The IPO market is experiencing waning excitement, partly because of underwhelming performance. Renaissance Capital’s FTSE Renaissance US IPO Index, which monitors companies that went public in the last three years, consistently underperformed against major equity indexes over a five-year period. High-profile firms like SpaceX and Stripe remain privately held, channeling their capital-raising efforts through secondary markets. These markets enable them to attract significant investments from private sources, further dampening the public IPO scene.
An interesting shift is the rise of secondary markets, where private companies can raise substantial funds without going public. SpaceX and Stripe exemplify this trend, with SpaceX described as a favorite in secondary markets. Secondary markets have grown significantly, with firms raising 92 percent more funds in 2024 compared to 2023, according to Bain & Co. This trend suggests an alternative route for financing emerging companies, bypassing traditional IPO processes.
The evolving nature of the IPO landscape poses challenges for retail investors. While institutional investors may benefit from initial price surges, retail investors often encounter higher prices post-IPO. Access to promising startups remains limited for individual investors due to the high entry barriers of secondary markets. Furthermore, the dual-class share structure diminishes the voting power and influence of retail shareholders in publicly traded companies.
While the IPO market remains sluggish, factors such as unprofitable company profiles, dual-class share structures, and the appeal of secondary markets to private companies contribute to this trend. Retail investors face limited opportunities and influence, while institutional investors dominate the space. The landscape may shift again as market conditions evolve, but current dynamics suggest a cautious outlook for those hoping for a quick turnaround in IPO activity.
