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Tuesday, May 21, 2024

Wall Street is hopeful for a resurgence of public offerings from firms

Spring is coming to the financial markets

Can you feel the chill? It’s a deep bone freeze and, in 2021, capital markets were incredibly hot. There was an average of at least one new firm going public every working day, but today, financial districts are icy. Private companies have been avoiding public markets for the last two years, as high interest rates have caused higher valuations to plunge and stock prices to fluctuate.

This has been bad news for Wall Street. In 2021, America’s five largest investment banks together earned an average of $13bn per quarter through their dealmaking and initial-public-offering (IPO) desks. Over the next two years, they barely managed half of that.

But could conditions be improving? Company bosses typically like to enter the market when stock prices are high, and investors are willing to pay more for shares. With markets now climbing back towards all-time highs, it seems the case. Executives are also seeing positive indicators in the form of narrow credit spreads and a strong economy, both of which are good news for the capital markets. In fact, rumors are swirling that numerous companies, from SKIMS to Stripe, are considering going public.

Furthermore, there have been signs of increased activity. Total investment-banking revenues were 15% better than expected in the fourth quarter of 2023, and bank bosses are cautiously optimistic about 2024. However, executives are still wary of volatility, as recent stock market movements have been unpredictable. This hesitancy means that, even though there is increased activity, the erratic movements could be putting off companies from taking the leap to go public.

The current market situation has led Gregory Brown and William Volckmann of the University of North Carolina to build a mathematical model to predict IPO volumes. Their findings have shown that the market is currently extraordinarily cold. In fact, the lack of IPOs has not been this low for such an extended period since the 1980s. They believe that the market is still feeling the effects of a rush of companies going public in 2021, depleting the stockpile of firms ready to list.

So, when might the IPO winter truly give way to spring? It’s a hard question to answer. Many believe that it will take more than a few quarters of rising markets and economic resilience to thaw the IPO market. It will need time, and during this time, unexpected developments such as climbing interest rates, could easily spook bosses all over again. However, there may be some green shoots poking through the ice in the near future.

Check out more from Buttonwood, our columnist on financial markets, in the links below:

– Bill Ackman provides a lesson in activist investing (Jan 11th)
– Why bitcoin is up almost 150% this year (Dec 18th)
– The mystery of Britain’s dirt-cheap stock market (Dec 14th)
– How the Buttonwood column got its name

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