Is the IPO Window Open?

The IPO market can serve as a proxy for overall market conditions for both public markets and private markets. Generally, companies will only come to market (and be advised to come to market by their investment bankers) when there is an appetite for risk assets. Since 2021, there has been a relative dearth of IPOs.1 The listings that have come to market in recent years have performed poorly and have not been supported by markets.2 Considering this poor performance and lack of listings forecasted, many market pundits have declared the IPO window “closed.” In this insight, we will discuss what the IPO market portends about private and public markets in light of recent trends.

The frequency and success of IPOs are telling indicators of broader trends in private equity. When IPO markets are robust, it suggests favorable conditions for private equity firms to capitalize on high valuations and strong investor demand. In such environments, PE firms often rush to list mature portfolio companies, signaling that they view the public market as an optimal exit strategy to maximize returns. A surge in PE-backed IPOs can indicate confidence in the underlying health of these companies and broader economic optimism.

Conversely, a slowdown or drought in IPO activity can reveal the opposite. When the IPO market is weak—often due to economic uncertainty, rising interest rates, or poor market sentiment—PE firms are more likely to hold off on taking companies public and opt for other exit routes, like strategic sales or secondary buyouts. Prolonged periods of subdued IPO activity can also indicate a build-up of "dry powder" wherein PE funds delay exits, leading to extended holding periods and potential liquidity pressure. Thus, the ebb and flow of IPO activity serves as a barometer not only for market sentiment but also for private equity’s ability to execute successful exits and drive value.3

Turning to public markets, strong IPO activity should also be seen as a positive there. It reflects a healthy demand for growth opportunities and risk assets, signaling confidence in future earnings potential and economic conditions. However, when public markets experience volatility or downturns, IPO windows narrow, indicating a more risk-averse environment. Companies may delay listings or seek alternative funding options, while those that elect to go public often face downward pressure on valuations and more conservative pricing. Public markets scrutinize financial transparency, governance, and growth prospects more rigorously than private investors, making the transition from private to public life a complex and high-stakes process. The state of IPO markets, therefore, not only offers a snapshot of current risk sentiment but also serves as a bellwether revealing underlying shifts in market trends for capital allocation, sector leadership, and economic outlook.4

In July, the CEO of Jeffries, Rich Handler, declared that he was advising companies that the IPO window has reopened, saying, “[t]he bottom line is this: the IPO market is OPEN and there is meaningful demand for companies that are priced appropriately and have strong management, durable business models and solid long-term prospects.”5 Despite this declaration, there has been continued skepticism from investors, and following a volatile beginning to August, we are not sure that the outlook for IPOs is positive.

Another part of this picture is the amount of pressure that exists behind PE investors. PE funds are often desperate to exit companies and, if there are no strategic buyers, they will be forced to look to the public markets. According to Mergermarket, global private equity exit value slid 45 percent year-on-year to US$337.34 billion in 2023, the lowest level observed in a decade.6 This is simply not sustainable; at a certain point, it seems that private equity to private equity exits cannot generate the liquidity necessary to satisfy existing investors.

So, while it seems that the IPO window is closed or only open for high quality companies, eventually it may need to fully open out of necessity because PE funds need to find liquidity for their portfolio companies.

In 2024, the IPO market has been characterized by a handful of debuts, but more so by notable delays, reflecting the complex environment in which companies operate today. High-profile IPOs include sizeable companies such as Reddit and Astera Labs. However, out of the 125 listings (most of which were acquisition corps), only 36 commanded a market cap above $500 million.

The path to public listing has been fraught with challenges, leading many companies to delay or cancel their IPO plans. Economic uncertainty continues to loom large, with fluctuating interest rates and volatility concerns dampening investor confidence. Institutional investor sentiment is also more cautious, with a heightened focus on profitability and sustainable business models. In the near term, notable companies such as StubHub, Stripe, Shein and Skims have all publicized plans to go public, but it might be difficult to execute on such plans.

The current IPO landscape presents a complex picture of both opportunity and caution. While many indicators suggest that the IPO window may be gradually reopening, economic uncertainty and fluctuating investor sentiment continue to be impediments. For PE firms, this environment requires a pivot towards alternative exit strategies, while remaining prepared for the market to come back. This is where the experience and acumen of institutional asset managers can be invaluable. Firms with multi-cycle experience are adept at navigating fluctuating markets, and can leverage their deep understanding of public and private market dynamics to optimize outcomes for investors.

Sources:

1. EY Global IPO Trends 2023
2. Q2 2024 IPO market trends | EY - US
3. Buyout Firms Seek Alternatives to Going Public in Weak IPO Market - Bloomberg
4. When Should a Company Go Public & How Big Should it Be? | Tipalti
5. The IPO window is open! (For some) (ft.com)
6. Market overview: The global IPO landscape | White & Case LLP (whitecase.com)