Key Takeaways

  • According to EY, in the first three quarters of 2024, the U.S. initial public offering (IPO) market raised a cumulative $27.3 billion, up 40% from the same period in 2023, but still well below levels seen earlier this decade.
  • During the same period, companies that chose to go public via IPO saw significant returns: an average gain of 23.9%, while the S&P 500, Nasdaq, and Dow Jones Industrial Average gained between 10.4% and 18.1%. The data comes from EY's Q3 IPO report shared with CFO Dive.
  • "If interest rate cuts maintain a steady pace, coupled with continued economic strength and favorable inflation data, this will lower the cost of capital, thereby stimulating IPO activity," Mark Schwartz, EY's Americas IPO and SPAC Advisory Leader, said in an email response on Friday.

Deep Dive

Despite signs of recovery in the IPO market, multiple headwinds remain. EY noted these include overseas conflicts, recession risks, the unpredictable outcome of the November 5 election, and potential policy shifts by the post-election government.

"IPO candidates and bankers are currently in 'cautious proceed' mode, mainly due to the upcoming election," Schwartz said. He added that executives considering going public are generally optimistic about the post-election period. According to EY data, U.S. IPO activity in post-election years averages 39% higher than in election years.

Schwartz believes the Federal Reserve's plan to lower borrowing costs will likely stimulate IPO activity. The Fed cut its key interest rate to a range of 4.75% to 5% on September 18. According to median projections from Fed officials released last week, they expect the federal funds rate to fall to 4.4% by December and 3.4% by the end of next year.

Schwartz noted that if "the stock market rally broadens to include small and mid-cap growth companies," IPO activity could approach previous historical records. He also mentioned that companies would be more willing to go public if "current post-IPO performance becomes more attractive" and concerns about inflation, the likelihood of a recession, and geopolitical turmoil subside.

EY said in its Q3 IPO report that investor anxiety has eased since August. At that time, the CBOE Volatility Index (VIX) rose to a four-year high amid tech stock volatility, "an increasingly competitive presidential race," and weak economic data.

Schwartz advised that in the current environment, chief financial officers (CFOs) considering an IPO should not delay in building connections with long-term "shareholder targets." "IPO investing today is more relationship-focused than in the past," he said. He also emphasized that CFOs should upgrade their "business and financial models" as soon as possible, because "that will be the cornerstone of your success as a public company."

Additionally, finance executives should consider alternatives beyond an IPO. Schwartz cautioned: "IPO market sentiment is volatile and should be approached from a position of strength."

EY's IPO data is based on deals confirmed as of September 16, as well as IPO projects expected to be completed by the end of September.