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Wall Street bankers are bracing for a resurgence of initial public offerings as private equity groups look to take advantage of strong U.S. stock markets to offload some of their top holdings.
Several private equity-backed groups have already filed paperwork with securities regulators for IPOs, including medical device company Medline and software maker Genesys.
Bankers and analysts expect a flurry of listing announcements in the first half of 2025, following big gains in US stocks in 2024 and hopes that President-elect Donald Trump will cut regulations and taxes.
Investors and bankers have also been encouraged by strong gains in share prices following recent deals. Shares in nine of the 10 biggest IPOs of 2024 ended the year above their listing price, with half of them – led by social media group Reddit – posting triple-digit gains.
“Sequential improvement and more activity, that’s the headline,” said Eddie Molloy, global co-head of capital markets at Morgan Stanley. “With a (economic) backdrop that’s a bit more secure, more pro-business-leaning regulatory policies and the Fed (cutting interest rates), we should be busier for sure.”
The expected rush of U.S. IPOs follows a drought in the past three years as the Federal Reserve’s sharp rate hike campaign, which begins in 2022, curbed investor demand for new listings.
Higher rates reduce demand for assets that are considered high risk, or that are valued based on the promise of distant future growth – both common traits of newly listed companies. Economists have scaled back their forecasts for how quickly the Fed will cut interest rates over the next 12 months, but still expect rates to fall further after the central bank announced three consecutive rate cuts by the end of 2024.
US listings raised $32 billion in 2024, excluding special-purpose buyout companies, according to Dealogic, up almost 60 percent in 2023.
Few observers are predicting a return to the deal mania of the pandemic period, when massive government and central bank stimulus programs boosted markets and led to a surge in IPOs that peaked at $150 billion in 2021.
However, bankers hope that capital markets activity will average $38 billion before 2020.
“Large IPOs (backed by private equity) will be the most important topic,” Molloy said.
The trend is driven in part by private equity firms under pressure to return cash to backers after a long deal drought. It also reflects a change in investor appetite after many were burned by bad bets on loss-making start-ups during the pandemic-era IPO rush.
“These are companies that are generally larger and more profitable, and therefore will be more palatable to public market investors,” said Jeremy Abelson, founder and portfolio manager at Irving Investors, a fund focused on growth that invests in private and public companies. “The difference between now and 2021 is that in 2021 there was considerable enthusiasm for mediocre businesses. We won’t see him again for a very long time.”
Fintech will also be a closely watched topic in the first half of 2025, with Swedish buy-now-pay-later group Klarna expected to be one of the first major venture-backed companies to tackle the market.
San Francisco-based mobile banking group Chime has also renewed its plans to go public, after initially aiming to list more than two years ago. Chime has previously discussed with investors a valuation of between $15 billion and $20 billion — a size similar to Klarna — according to two people familiar with the talks, although technology and financial stocks have made strong gains since last month’s election in USA, which can help raise its final rating. Chime declined to comment.
Some observers have been surprised by the relative calm in the IPO markets given the broader strength of U.S. stocks over the past two years, with the S&P 500 up almost 70 percent from 2022 lows. However, many of these gains have been driven by a small number of very large companies, rather than the smaller groups that typically float their own shares.
Ryan Nolan, co-head of software investment banking at Goldman Sachs, said expanding stock market gains in the second half of 2024 had helped confidence. “There’s a lot more excitement and momentum,” he said.
Many private companies secured large amounts of financing at inflated valuations in 2021, which reduced the urgency for further deals and made executives reluctant to accept new money at a depressed valuation.
Samantha Lau, chief investment officer for small- and mid-cap growth stocks at AllianceBernstein, said private investors are now showing a “more realistic attitude” to valuations.
“It’s been enough time since 2021 that things will have to start melting,” she added.
