Where have all the IPOs gone?

While initial public offering (IPO) activity picked up in 2024’s second quarter, from a historical perspective, IPO activity remains soft. There were 35 new IPOs in 2024’s second quarter, an improvement over the 25 IPOs from the first quarter and 30 IPOs in 2023’s second quarter.

IPOs typically become more frequent occurrences during periods of strong stock market performance. As recently as 2021, more than 900 U.S. companies issued IPOs. However, 2022’s bear market slowed IPO activity. Although the U.S. stock market stormed back with a 26% return in 2023 and a 15% gain through July 2024, IPO activity is down significantly from 2021 levels.

U.S. stock markets generated gains in six of 2024’s first seven months. However, the environment turned shaky in early August, with the S&P 500 declining 8.5% from its mid-July peak. It recovered some of that ground, but investor concerns about potentially negative economic signals appeared to contribute to greater market uncertainty.

A more volatile equity market environment might dampen the IPO market, according to Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management. “When you get market volatility and investors have other urgencies in managing their portfolios, they typically aren’t looking to take on new issues,” says Haworth. “A market downturn typically causes a pause or delay in IPO activity.”

Historical trends in the IPO market

IPO activity often tends to peak during periods of strong equity market performance. “When stock markets are doing well, investors are receptive to high-growth companies so it’s a more favorable environment for new stock issuance,” says Kaush Amin, head of private market investing at U.S. Bank Wealth Management. He contrasts that to more challenging equity market periods.

“When interest rates began moving higher in 2022, perceptions changed,” says Amin. “Investors turned their focus to stocks of companies that could generate current earnings and put less faith in stocks of companies that mainly promoted the prospects of future earnings. Most IPOs would fall into the latter category.”

While market conditions may contribute to the lack of IPO activity, Haworth notes that increasing interest in the private equity market may play a role as well. “Many firms that might, in the past, have been in an IPO pipeline may instead be absorbed by the private equity market,” says Haworth. “Companies can even change hands several times within the private equity market.” Haworth says we’re seeing fewer situations where venture capital firms look to take companies public through an IPO, with private equity playing a bigger role in helping provide financing for young, privately-held companies.

The attraction of new IPOs

IPOs often garner significant media attention, particularly when better known or highly successful private companies choose to go public. Investors take an interest as they see a stock that has just been offered on the public markets as a “ground floor” investment opportunity.

“Individual investors should realize that they are not specifically buying the initial public offering,” says Haworth. “Even if an investor buys the stock on the first day it becomes available, it technically means they’re buying the stock on the secondary market, after the IPO already occurred.” Large underwriting syndicates, and sometimes select brokerage firms, typically have exclusive access to shares from the IPO issuer.

While investors may have a desire to own stocks as quickly as they come to market, a reasonable concern is whether that’s appropriate for a long-term investment strategy. “The early days of trading in an IPO can be very speculative. The real value becomes more apparent six months after the initial offering,” says Amin. He notes that once a stock goes public, there’s a 180-day lockup period that restricts private investors in the company from selling shares. “Once that lockup period expires, you’ll have a better sense of private investors’ sentiment about the company’s outlook,” says Amin.

If many private investors put their shares on the market when the lockup period expires, it may reflect a lack of confidence in the company’s future prospects. If instead more of those investors hold onto their stock, it may indicate their expectation of future share price appreciation. That would be a positive sign to other investors.

Haworth points out that companies from all industry sectors go public, with no discernible trend indicating which tend to perform best over time. “It’s really a company-by-company situation,” says Haworth. “Certain environments may favor certain types of stocks, but there’s no particular advantage a specific industry has demonstrated over time.”

Recent IPO performance

Based on at least one recognized measure, IPO performance has fluctuated over time. An exchange-traded fund (ETF) known as the Renaissance IPO ETF invests in newly issued stock. The fund holds IPO issues for no more than three years after they go public.

The fund’s share price gained 34% in 2019 and 108% in 2020, before experiencing declines of 10% in 2021 and 57% in 2022. The fund rebounded in 2023, returning 52.5%. The fund rallied modestly in 2024, gaining 6.7% year-to-date through July.²

The performance of individual IPO issues will vary widely with the results of the Renaissance ETF fund. To demonstrate the potential volatility of new IPOs, consider the experience of British semiconductor and software design company Arm Holdings, which went public on September 14, 2023. Arm’s stock opened on public exchanges priced at $51 per share. Its price jumped to more than $65 during the next trading day. However, by October 20, 2023, the price declined to $47.87. It recovered to more than $75 per share by the end of 2023 and soared to nearly $186 per share in mid-July 2024 before giving back some of those gains, dropping to $107 per share in early August.3 In this case, those who invested shortly after the stock went public profited.

By contrast, another stock that went public in September 2023, the grocery delivery company Instacart, had a different experience. Its stock opened on public markets at $42 per share. Its price dropped quickly, ending 2023 at $23.47. Instacart stock recovered to $39.12 per share in April 2024, with its price dropping to just over $31 in early August.³ In this case, investors who purchased at or near the initial offering price have suffered a loss, at least to this point. These examples reflect the unpredictable, short-term nature of new issue pricing. Haworth notes that the day an IPO first hits the market “is often the peak of enthusiasm for the stock, and the environment often becomes more challenging thereafter.”

A longer-term trend common with IPOs, adds Amin is that, “We see newly issued stocks rise faster than the broader market in a bull market, but also potentially decline more rapidly than stocks as a whole in a declining market.”

Assessing the IPO market’s role in your portfolio

IPOs offer a combination of opportunities and challenges. Some companies that demonstrate an ability to grow consistently over time may generate favorable returns for investors who are able to take advantage of the new issuance of stock. That’s the goal many investors have in mind when they invest in new issues. However, that scenario doesn’t always play out.

“One challenge for investors with an interest in IPOs is that they have to try to do research on a company that’s been privately held,” says Haworth. “Without the kind of readily available information that must be disclosed by public companies, it can be difficult to discern the quality and value of the stock.” Haworth urges investors to carefully assess how any IPO investment might fit in with their overall portfolio strategy.

Because of their limited track record, IPOs can be more speculative than established stocks. Before investing, talk with your wealth professional about how new issues in the IPO market may benefit your long-term investment strategy.

Note: The implied volatility and speculative nature of initial public offerings may make IPOs better suited for investors with longer term time horizons who can bear a substantial loss of principal.