The unicorns and decacorns lining up for the long-awaited return of mega-listings in 2024 are worthy candidates. They were worthy this year, too – and yet, here we are.
From Reddit Inc to Syngenta Group to CVC Capital Partners, debuts meant to restore sickly global initial public offering activity to health have been pushed back, sometimes repeatedly. Companies and investors have yet to entirely bridge the gap between their respective valuation expectations, set during boom times fueled by cheap money.
Though bankers remain broadly upbeat about 2024, even they admit that after months of headfakes failed to sustain activity, a true return to health could take months.
“It would be premature to say that there’s a normalized IPO market right around the corner,” said Eddie Molloy, Morgan Stanley’s co-head of equity capital markets Americas.
Nearly US$130 billion has been raised through global IPOs this year, tracking for the worst since 2009, data compiled by Bloomberg show. With mediocre post-debut trading in several of the year’s largest offerings giving new entrants pause, the return to a typical IPO market may drag on as late as — whisper it softly — 2025.
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While the coming year’s IPO activity should provide a meaningful uptick from 2023, 2025 is when “we go back to pre-Covid normals,” said Achintya Mangla, JPMorgan Chase & Co.’s global head of equity capital markets.
The bank is taking a view over the longer-term IPO “cycle holistically as opposed to 2024 versus 2025,” he said.
Delayed IPOs
It’s not unusual for companies to plan their first-time share sales well in advance. Still, the delays faced by some of the largest potential issuers go some length to explaining IPO markets in 2023.
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CVC, one of Europe’s biggest private equity firms, had been exploring an IPO for several years before preparing in October to kick off a listing in Amsterdam, people familiar with the matter said. A month later it was all off the table. With European IPO markets in a parlous state – they have raised just US$13.9 billion this year, and are on track for the lowest total in at least a decade, data compiled by Bloomberg show – the risk may have been deemed too great.
Syngenta started preparations even earlier, moving in 2019 only two years after its Chinese state-backed buyer completed its takeover of the Swiss giant. By 2023 the pieces appeared to be in place. Not long after, China’s securities regulator moved to cool the country’s then-robust IPO market and stabilize stocks to prevent spillover from an escalating real estate crisis. In November, Syngenta officially delayed its listing to late 2024.
Reddit tapped banks for a potential IPO as soon as March 2022, Bloomberg News reported that year. Coincidentally, that was the same month that the Federal Reserve began its rate-hiking campaign. Now, with the end of the cycle and the bond market pricing in numerous rate cuts, and a broad-based rally having pushed the benchmark S&P 500 higher by 23% this year and the Cboe Volatility Index, or VIX, near the lowest since January 2020, Reddit is getting ready for a 2024 debut, people familiar with the matter have said.
More stable fundamentals have stirred optimism that the range of companies tapping public investors next year will spread to growth-oriented firms.
“There will be more IPOs to come to market with the possibility that rates may have peaked,” said Jim Cooney, head of Americas ECM at Bank of America Corp. “Investors have returned to looking for growth assets and IPOs provide that option.”
Another factor that could draw companies to strike deals: time.
The valuation gap — the difference between how sponsors and management of private companies perceive themselves, sometimes based on previous valuations from pre-IPO funding rounds and what public investors are willing to pay — remains a sore point.
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Still, delayed IPOs impact investors’ internal rate of return, said Matt Warren, co-head of Americas ECM cash origination at Bank of America.
“At some point, you have to start the monetization process to realize gains,” Warren said.
Late-stage private companies are more “accepting that the prices of 2020-2022 are not coming back and that today’s public valuations are the new normal,” said Matthew Witheiler, who manages Wellington Management’s diversified late-stage growth equity business.
“There’s still a gap in terms of valuation but folks have become more constructive around those aspects,” said Douglas Adams, global co-head of equity capital markets at Citigroup Inc. “Everyone is talking about 2025 as a year when we could see a significant number of IPOs given the 2024 calendar, but there are a significant number of companies evaluating accessing the market in 2024.”
US Pipeline
The pipeline of 2024 IPO candidates in the US is deep, and littered with household names from Kim Kardashian’s Skims underwear brand to e-commerce giant Shein, which has been preparing to go public in what will serve as a critical test for companies that face political scrutiny.
Though investors may be ready to take bigger risks, they won’t tolerate a repeat of 2020 and 2021, whose debutant classes are trading on average about 30% below their IPO prices.
“We’re very conscious that the 2020 and 2021 IPO class faced challenges in generating returns,” JPMorgan’s Mangla said. “However, we’ve seen a positive shift this year. The real question is to consider what an IPO does six months, three months, and a year from the IPO?”
As the market creaks open, Wall Street will look to nurture companies that at least have a path to generating profits. A strong return to IPOs for firms with businesses predicated on growing at all costs is unlikely to happen any time soon.
“While growth remains a crucial factor for the IPO market, there’s been a clear shift towards prioritizing profitability,” said Keith Canton, head of JPMorgan’s Americas ECM group.
“As we move into Q2 and the latter half of the year, companies on the edge of profitability with a more growth-oriented approach will likely receive increased attention from IPO investors,” Canton said.
Election Calendar
The US’s high-stakes election is far from the only potential change of leadership event on the calendar in the coming year. Though Indian Prime Minister Narendra Modi is likely to hold onto power, leaders in the UK, Germany, Canada and Japan are facing turmoil and low approval ratings that are pressuring them to call elections as soon as 2024.
Investors are set to continue piling into the Middle East, which has seen a rush of IPOs into the end of the year despite fears that the Israel-Hamas war would stifle enthusiasm. In Europe, spinoffs have proven to be a rare highlight for investors wondering where the first-time share sales went.
Japan, where the plunging yen has helped the benchmark rally nearly 25% this year, has been repeatedly tipped by dealmakers as an IPO market to watch. It’s unlikely to fully offset the absence of big listings in China or Hong Kong, with banks slashing jobs amid economic malaise.
“Asia continues to be very interesting,” Citi’s Adams said, and also singled out companies in Brazil. “We think about where there is innovation and interesting companies, and Brazil is one area where we’re spending a lot of time,” he said.
Still, developments in the US inevitably cast a long shadow. Companies around the globe are “interested in what’s going on in the US market and how that translates globally,” Adams said.
