The U.S. Initial Public Offering (IPO) Market in 2024 has begun sluggishly, continuing the downturn from a particularly challenging 2023, despite investor optimism late last year for a revival in IPO activity. In December, Crunchbase surveyed 40 venture capital investors who mostly observed signs of recovery in the stagnant 2023 market, anticipating improvements in the macro environment extending into 2025. However, the difficult start to the year is part of an ongoing trend rather than an anomaly, following two lackluster years and a multi-decade decline in the number of publicly listed companies in the U.S.
The past two years have been marked by heightened uncertainty and volatility. In 2022, the IPO market suffered a significant downturn, mainly due to the post-pandemic inflationary pressures, which prompted the Federal Reserve to implement a series of aggressive interest rate hikes. These rapid rate increases and growth uncertainties led to a decline in investor appetite for risk assets. According to Renaissance Capital, 2022 was among the worst IPO markets on record, when 71 new issues raised $7.7 billion, averaging -31% performance after they began trading.
As we moved into 2023, the IPO market continued to struggle, with many of the previous year’s challenges persisting. Renaissance Capital’s annual review noted a modest increase in IPO activity, with 108 companies successfully raising $19.4 billion. In response to the ongoing economic uncertainty, companies that might have considered public offerings chose to remain private or explore alternative funding sources. This cautious approach was evident in the decisions of high-profile companies like Databricks, Stripe, and Plaid, which either opted for private financing rounds or delayed their public debuts. While the IPO market is now just thawing after the past two years of subdued activity, the trend of companies staying private longer is not new.
Over the past few decades, there has been a noticeable decline in the number of public companies in the United States. According to The World Bank, the total of listed U.S. companies has decreased from a peak of 8,090 to just 4,642 today, down from 7,255 in 1994. This long-term trend is tied to companies choosing to remain private for extended periods, which carries significant implications for public markets. Primarily, this trend results in delayed access for public market investors to high-growth investment opportunities, as companies often go through their most rapid growth phases while still private. Second, this shift contributes to a decrease in publicly listed companies, potentially reducing the diversity and range of investment options available in public markets. Third, when these companies decide to go public, they often do so at much higher valuations, presenting a different risk-return profile compared to earlier stages of their development.
Despite the ongoing challenges in the IPO market, there remains optimism it will improve this year. After the slow start to 2024, the first quarter ended with several successful IPOs. At the end of the first quarter, 30 new issues raised over $7.8 billion, already eclipsing the total raised through IPOs in 2022. Ernst and Young’s review of the first quarter IPO market provided some promising data, highlighting a 230% increase in total funds raised by IPOs compared with the first quarter of 2023. Many IPOs traded higher than their initial listing price and continue to trade at a premium to where their new issue was priced.
In conclusion, despite the initially sluggish start to 2024 and the broader challenges of recent years, there are encouraging signs that the U.S. IPO market is beginning to reopen. With substantial capital raised in the first quarter surpassing previous years’ totals and several new issues outperforming expectations, optimism for a rebound remains strong. These developments suggest a potential shift towards a more active and prosperous IPO landscape.
