Recovery in the equity markets is spurring hopes that the market for IPOs will pick up in the year ahead.  Read on to discover what that could mean for investors.

November was a strong month in investment markets, with Europe recording its best growth since January (the Eurostoxx 600 was up 6.4%), and US markets their best since July of last year (the S&P 500 up 8.9% in dollar terms).

After around three months of declining markets, it was a reminder that as an investor, you’ve got to hold your nerve sometimes to benefit from the uptick when it comes.

The broader sell-off in markets over the last two years has tested all investors’ patience. It is only now we are starting to see light at the end of the tunnel in terms of conquering inflation, which in turn will lead interest rates to stabilise and eventually reduce.

What’s an IPO?

IPO, or initial public offering, is the process whereby a private company floats, or launches its shares for sale on the stock market for the first time.  In the process it becomes publicly listed, meaning its shares are available for general purchase by investors.

It’s been a poor time for new companies joining the stock market lately. According to consultancy EY, IPOs were down from a high of 2,436 in 2021 to 968 in the first nine months of this year.

If falling inflation is real trigger for a sustained recovery in valuations, the re-opening of the IPO market is another ray of light.  It’s a concrete sign that investors see growth prospects in shares, and that businesses have a compelling story to tell the markets.

What’s happened so far in 2023?

There have been several successes already.  Perhaps the biggest winner so far is Birkenstock, the German maker of sandals and footwear.  It’s up 20.5% in a recent recovery since floating in mid-October.

Selling cork sandals might be quite different to the AI revolution and other investment stories of 2023.  But this business turned 35 cent of every Euro of sales into profit last year.

Then there’s ARM Holdings, the UK semiconductor company.  After falling post-IPO, shares have recovered to a small gain, valuing the business at $65 billion.

There have been some misfires too. CAB Payments, a fintech company, has lost more than 80% of its value since listing on the stock market in July. That’s a huge loss in value in a very short time.  And while it’s early days to judge, US grocery delivery business Instacart is down almost 25% in the ten weeks since its stock market debut.

Lastly, in an Irish context, stock markets have seen an exit of Irish companies, with buildings materials business CRH, one of the biggest Irish businesses, moving its main listing to New York, and delisting from the Irish stock exchange after trading there for more than eight decades, and Flutter (aka Paddy Power) announcing plans to do the same next year.

What’s driving renewed activity in the IPO market?

Four main factors are driving momentum in IPOs.  Firstly, there’s the relatively benign economic environment, including indications that the bulk of interest rate rises are behind us.

Then there’s the fact that many private equity investors have been waiting longer than they intended to crystalise their investment through an exit on the stock markets.

Irish-American payments technology company Stripe, for example, first filed notice of its intention to IPO in July 2021.  Everyone in Ireland holds a stake through the Irish Strategic Investment Fund or ISIF  investment in Stripe in March 2021.

Thirdly, with interest rates higher, debt has become less attractive compared to equity as a way to finance a company.  Stock markets offer a funding solution for that.

And lastly, there’s the all-important quality in financial markets: a growing sense of momentum.

What’s in the pipeline for 2024 and beyond?

A brace of interesting companies have been mentioned as being lined up for an IPO in 2024.  There are retail, B2B, renewable energy and tech companies among them.

They include among others Klarna, the Swedish buy now, pay later technology company; Shein, the Chinese fast-fashion business; Starlink, the satellite internet division of Space Exploration Technologies (SpaceX); Reddit, the US social media company; Huel, the powdered food and meal replacement maker; and UK bookseller Waterstones.

While an IPO offers these companies a route to further funding, and an exit for existing shareholders (and staff rewarded with RSUs, or restricted stock units), companies that float in 2024 can expect greater scrutiny from an ESG perspective.

Shein, for example, has faced questions concerning its labour practices in China and its environmental record.  And Klarna has had criticism that it makes it easy for consumers to amass too much debt.

What would a strong IPO market mean for investors?

Ultimately, a reawakening IPO market is positive for investors.  It brings new investment opportunities, market momentum, and scope for growth.  We’ll know over the coming months if that’s to come to fruition in 2024.

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