As new issues start coming to market again, what will it take to return to initial public offering (IPO) volumes of years past? The IPO market had a banner year in 2021, and investors were eager to join the party as average 30-day returns topped 20%. That year, nearly 400 IPOs raised more than $150 billion, fueled by historically low interest rates, massive economic stimulus and record public company valuations.
Strong investor interest enabled companies to modify IPO processes and terms to accommodate their interests and those of their key stakeholders. For example, many IPOs featured shorter and staggered lockup periods compared with the “standard” 180-day IPO lockup, facilitating earlier liquidity for shareholders but eviscerating share supply constraints for investors. As investor leverage waned in the hot IPO market, we also saw hybrid auctions gain popularity, forcing investors to bid for shares and driving IPO prices higher.
IPO activity slowed dramatically in 2022, with only 90 IPOs generating less than $10 billion in proceeds. Challenging market conditions emerged — by October, the S&P 500 had dropped more than 25% from 2021 highs, inflation surged to a 40-year record, the Federal Reserve increased rates from 0.25% to 4.5%, and stock market volatility spiked to levels that made investors wary of investing in new public companies.
As we enter the second half of 2023, a thaw in the IPO market may be underway, with the pace and size of US IPOs beginning to recover over the past few months. Through midyear, 63 IPOs raised $10 billion, representing increases of 115% and 24%, respectively, compared with the prior year period.
While some of the improvement is attributable to larger strategic carve-out IPOs, the market backdrop for IPOs has improved considerably — equities have rebounded with the S&P 500 up more than 25% from October 2022 lows, inflation has been moderating, interest rate hikes may be nearing an end, and market volatility has returned to pre-pandemic levels.