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IPOs rebound as equity markets continue to climb
The IPO window continued its gradual reopening as US equity markets navigated volatility to reach record highs in the first half of 2024. The tech sector provided a market boost due to mega-cap equities with artificial intelligence (AI) related growth drivers. The AI halo effect has also expanded investor interest to a wider range of tech and infrastructure companies. For example, utilities, traditionally a defensive sector, outperformed the S&P 500 in the second quarter largely due to investor interest in an expected surge in AI energy demand.
The IPO market continued its momentum from the first quarter. Proceeds raised during the first half of the year were nearly double those of the same period last year and nearly four times the proceeds raised during the first half of 2022. While the first quarter’s IPO activity was dominated by life sciences companies, the second quarter saw broadening participation from other sectors, including tech, consumer markets and financial services. Additionally, the stock prices for this quarter’s traditional IPOs were up nearly 15%, outperforming the S&P 500, which was up 4% in the second quarter— further highlighting the strength and resilience of the IPO market.
There’s also a growing list of international companies, including some European energy giants, looking to list in the US to access a deeper investor base and higher valuations. Momentum could continue into the third quarter as IPO hopefuls still in the queue are considering listing ahead of the US presidential election.
We view the IPO market as open for any company with appropriate scale, strong growth prospects, profitability or a path to profitability, and which is already operating like a public company. Market windows can open and close quickly, so it’s important to start your preparation process well in advance to better position your company to act.
The US economy remained resilient during the first half of 2024. Consumer spending and overall business investment remained positive, weathering higher rates, elevated inflation and an uncertain economic outlook. Companies continued to hire at a robust pace through the first five months of the year. Sustained income growth has supported consumer spending, offsetting the drag from a drawdown in household savings.
However, the recent strength in the US economy and a near-term stall in lowering inflation back toward the Federal Reserve’s 2% target have pushed the timing of a potential first rate cut to later in 2024. The resulting higher rates for longer will likely continue to weigh on business activity and consumer spending in the coming months.
Our baseline outlook calls for an ongoing expansion of the US economy this year, but we expect US real GDP growth to slow modestly from 3.4% annualized in the fourth quarter of 2023 to around 2.0% by the fourth quarter of 2024.
“The IPO markets continued their gradual reopening in Q2 2024, as attention now shifts to the window before the US elections.”
IPOs build on strong momentum in the second quarter
- The second quarter saw continued momentum in traditional IPOs, with 20 companies going public, marking the highest number since the fourth quarter of 2021. While life sciences and biotech-related companies were the busiest IPO sector in the first quarter, they have since moderated with only four IPOs during the second quarter.
- This quarter witnessed the largest IPO since the third quarter of 2023, as a prominent cruise ship operator entered the public markets raising over $1.5 billion. It has outperformed the equity markets and is up 41% since debut.
- Interestingly, a highly anticipated cybersecurity software company raised proceeds with 2021-like metrics (e.g., high topline growth but also growing, substantial operating losses) and surged 16% on debut. Although it is now down 4% since pricing, this could be a sign of changing investor appetite, as investors may be warming again to unprofitable but high-growth companies.
- A well-known social media company (with scale, but also unprofitable) that priced last quarter is up 88% since debut. This gain seems to be driven primarily by the positioning of its equity story. While not directly related, the company has been able to articulate its medium to longer term growth prospects as benefiting from AI-driven demand and has demonstrated how the company is uniquely positioned to capitalize. This approach has resonated well with investors, highlighting the importance of a well-articulated equity story.
- The momentum for SPAC IPOs, SPAC merger announcements and completions continues to slow. The second quarter saw 10 SPAC IPOs, while there were 16 SPAC merger announcements and 10 SPAC merger completions.
- The longer-term outlook for IPOs is promising as a strong and diverse pipeline of companies looks to go public. With a favorable economic forecast (PwC estimates a 90% likelihood of a soft landing), continued economic growth, inflation nearing the 2% target, potential Fed rate cuts and record dry powder waiting on the sidelines, we believe the IPO market will continue to remain robust over the long term.
AI continues to dominate venture capital investment
- Venture capital (VC) invested $56 billion in the second quarter, with 62% allocated to later stage investments. This level is consistent with 2018 and 2019, despite the significant decline from 2021 highs.
- AI and machine learning (ML) companies continue to attract significant VC attention, raising $23 billion in the second quarter. Corporate VCs continue to maintain a strong position in the market, highlighted by significant acquisitions in the AI sector, demonstrating the urgency of addressing hardware challenges.
- VC interest in AI-powered defense technologies has surged, driven by geopolitical conflicts and increased government spending. Companies specializing in AI data training and unmanned systems are securing large funding rounds, reflecting a broader trend of significant investments in national security-focused tech startups.
- The unicorn creation rate remains slow compared to the peak years of 2021 and 2022. This quarter saw 15 new unicorns, with six being AI and ML companies.
- Of the 35 Traditional IPOs in 2024, 17 have been backed by venture capital.
- Looking ahead, there’s a lot to be optimistic about. Tech innovation continues to grow at an exponential rate and firms still hold large amounts of dry powder. Activity will likely start increasing as the IPO markets continue to pick up. In the interim, companies and founders should continue to balance growth and profitability, while managing cash burn by raising funding at opportunistic but realistic valuation expectations.
Debt markets continue positive momentum
- The US debt capital markets raised $585 billion in the second quarter across the investment grade bond, high-yield bond and leveraged loan markets. This marks a 24% decrease from the first quarter but continues positive momentum for the year.
- Refinancing and repricing activity dominated the leveraged finance markets in the second quarter. The second quarter saw $179 billion raised for refinancing activity. Notably, in May, the leveraged loan market saw its busiest month on record with $180 billion in primary market activity with $119 billion attributed to repricing volume alone.
- The frenetic pace of repricing and refinancing activity is largely due to a surge in demand for risk assets like leveraged loans and high-yield bonds. Loan prices have rallied with more than 50% of all outstanding loans trading at or above par on average in the second quarter. Additionally, May proved to be the high-yield bond market’s busiest month since September ’21 with $32 billion of new issue activity.
- M&A and LBO issuance remains muted as the higher for longer interest rate environment makes financing more expensive for strategic acquirers and sponsors. There was $51 billion for M&A and LBO activity in the second quarter.
- Looking ahead, the market outlook remains positive. Issuers have largely been able to access the capital markets to extend maturities and investors have continued to show demand for risk assets. With more progress on inflation and a potential rate cut this year, the M&A and LBO pipeline should return as well.
Note: IPOs with deal values of less than $25 million, best efforts offerings, oil and gas royalty trusts, business development companies, pricing on OTC Bulletin Board and OTC Pink Sheets are excluded from this narrative. Data from SEC filings and third-party databases are as of June 30, 2024.
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