(originally published July 29, 2024)
After two very difficult years in the market for issuing companies and IPO Investors alike, the IPO Prophet believes we are finally seeing a meaningful resurgence in activity. This is a good thing because those who really understand the IPO market understand that it runs in cycles of its own. This is described in a number of different ways, sometimes characterizing the “IPO Window” as open or closed or the IPO market as hot or cold. However it is described, the fact is that a confluence of factors; interest rates, company and market valuation multiples, and volatility impact investor demand and issuer willingness to participate in the IPO dance. Much like a wedding reception each cycle begins tentatively and slow before building up a full-head of steam filled with late night shenanigans. At IPO Prophet we find a lot of information in not simply studying the IPO market but also in analyzing data from past signals in our algorithms.
The following table illustrates activity in the IPO market as seen through our lens. This is a summary of offerings categorized by year. These offerings must meet our proprietary criteria and includes factors such as Issue Size being at least $100mm and opening at a premium to issue price. We also exclude things like SPACS and Closed-end Trusts. We then track average premium and average trade ROI following our signals. These factors give us a unique view in assessing the strength of the IPO Market.
The period from 2012 to 2016 saw the IPO market emerging from the shadows of the global financial crisis. The total deal size in 2012 was relatively modest, but there was a sense of cautious optimism. The years 2013 and 2014 witnessed a surge in IPO activity, with notable offerings such as Twitter's $1.8 billion IPO in 2013 and Alibaba's record-breaking $25 billion IPO in 2014, which was the largest in history at the time. These offerings were not just financial events; they captured headlines to fuel new issuance.
In 2014, The Wall Street Journal noted, "The Alibaba IPO has set a new benchmark for public offerings, underscoring the potential of technology companies to drive market enthusiasm and capital flows." This sentiment was echoed by many as the IPO market reached its peak in terms of total deal size. However, the subsequent years saw a decline, culminating in a trough in 2016. The market slowdown was attributed to various factors, including global economic uncertainties, possible regulatory changes, and uncertainty around the US Presidential Election.
The market began to recover in 2017, and by 2018, there was a noticeable increase in IPO activity. This period was characterized by a steady growth in total deal sizes, reflecting a renewed investor confidence. The IPO of Spotify in 2018, which opted for a direct listing rather than a traditional IPO, was a landmark event that showcased the evolving nature of public offerings. The Financial Times commented, "Spotify's successful direct listing marks a new chapter in the IPO market, providing a viable alternative for high-profile companies seeking to go public." While we do not include direct listings in our trading strategy. These headlines carry a lot of weight in the IPO market.
The crescendo of this cycle was reached in 2020, a year that defied expectations. Despite the global pandemic, the IPO market saw an unprecedented boom, with companies like Snowflake and Airbnb making headlines with their multi-billion-dollar offerings. Snowflake's IPO raised $3.4 billion, the largest software IPO ever, while Airbnb's $3.5 billion IPO was a testament to the resilience and adaptability of the market. The average premium and ROI peaked during this period, reflecting the high valuations and investor enthusiasm.
The years 2022 and 2023 marked a significant downturn in the IPO market, with total deal sizes plummeting. Economic uncertainties, inflation concerns, and geopolitical tensions contributed to this trough. However, 2024 has shown signs of a resurgence. The market is beginning to rebound.
During the trough years, many companies chose to stay private longer than they might have in a more favorable market. This has led to a backlog of high-quality, high-potential companies that are now anxious to go public. Companies such as Stripe, which has been speculated to go public for years, and other tech giants like SpaceX, are frequently mentioned in discussions about potential upcoming IPOs. As Bloomberg reported, "The potential IPO of Stripe is a pivotal moment, signaling a possible revival in the IPO market amid challenging economic conditions."
TechCrunch noted, "There is a significant backlog of unicorns and other high-growth companies that have deferred their IPO plans. As market conditions improve, we can expect a wave of new offerings." This backlog is likely to drive a surge in IPO activity as these companies look to tap into public markets.
The odd looking chart above illustrates the ranges of premia for IPOs in past years. In trough-cycle years the average premium of offerings as well as the range of those premia collapses. As the IPO market recovers the averages improve. Since the fall-off in the IPO market in 2022, we have begun to see this improve. IPO Prophet expects this trend to continue and with an increase of deal activity we are optimistic that we will see a multi-year upswing in the IPO market. Last week’s $4.4 billion offering for Lineage Inc. was a positive datapoint for the 2024 IPO Market. This offering was the largest of the year and valued the company at $18 billion. Offferings like this signal to the market and other issuers that there is appetite for new issuance. With developments like this, the IPO Prophet sees good things on the horizon.