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Wall Street bankers are preparing for a return to initial public offerings as private equity groups look to take advantage of the strong U.S. stock market and sell some of their major holdings.
Several private equity-backed groups have already filed papers with securities regulators for IPOs, including medical device company Medline and software maker Genesis.
Bankers and analysts expect a flurry of listing announcements in the first half of 2025, driven by strong gains in U.S. stocks in 2024 and hopes for regulation and tax cuts from President-elect Donald Trump.
Investors and bankers are also encouraged by the stock’s strong rise in recent trading. Nine of 2024’s 10 largest IPOs ended the year with stock prices above their listing prices, with half posting triple-digit gains led by social media group Reddit.
“Continued improvements and more activity, that’s the headline,” said Eddie Molloy, Morgan Stanley’s global co-head of equity capital markets. ” [economic] The background is a little more certain, with a strong tendency toward companies leaning toward regulatory policy and the Fed. [cutting interest rates]it should certainly be busier. ”
The expected IPO rush in the U.S. comes after a drought over the past three years as the Federal Reserve’s campaign to raise interest rates sharply starting in 2022 dampened investor demand for new listings.
Higher interest rates reduce demand for assets considered to be riskier or those with potential for distant future growth, both characteristics common to newly public companies. Economists have been scaling back their expectations for how quickly the Fed will cut rates over the next 12 months, but interest rates are still on track after the Fed announced a third consecutive rate cut at the end of 2024. We expect it to decline further.
According to Dealogic, publicly traded U.S. companies, excluding special acquisition vehicles, raised $32 billion in 2024, an increase of about 60% from 2023.
Few observers predict a return to the pandemic-era trading frenzy that led to a surge in IPOs that peaked at $150 billion in 2021, as massive government and central bank stimulus programs boosted the market.
But bankers expect equity capital market activity to exceed the pre-2020 average of $38 billion.
“big [private-equity backed] IPO will be the most important topic,” Molloy said.
The trend is being driven in part by private equity firms, which are under pressure to return funds to backers following a prolonged deal-closing drought. It also reflects a shift in investor appetite after many investors made unsuccessful bets on money-losing startups during the pandemic-era IPO rush.
“These companies are typically larger and more profitable, and therefore more palatable to public market investors,” said Irving Investors, a growth-focused fund that invests in private and public companies. said Jeremy Abelson, Founder and Portfolio Manager. “The difference between now and 2021 is that in 2021 there was a lot of enthusiasm for ordinary business. We won’t see anything like that for a long time.”
Fintech will also be a hot 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 venture into the market.
San Francisco-based mobile banking group Chime, which initially sought to go public more than two years ago, has also updated its plans to go public. Two people familiar with the talks said Chime had previously discussed a valuation of $15 billion to $20 billion with investors, about the same level as Khurana, but since last month’s U.S. presidential election, tech stocks have been on the rise. and financial stocks have risen significantly and its final valuation this may contribute to the stock price rise. Chaim declined to comment.
Some observers are surprised that the IPO market has been relatively quiet, given the general strength of U.S. stocks over the past two years, with the S&P 500 index up nearly 70 percent from its 2022 lows. But many of those gains come from a small number of very large companies, rather than a small group that typically makes their stocks fluctuate.
Ryan Nolan, co-head of software investment banking at Goldman Sachs, said the broader stock market rally in the second half of 2024 was a boost to confidence. “There’s more excitement and more momentum,” he said.
Many private companies secured large amounts of capital at inflated valuations in 2021, reducing the urgency for further deals and making management reluctant to lower valuations and accept new capital. .
Samantha Lau, chief investment officer for small- and mid-cap growth stocks at AllianceBernstein, said retail investors are now taking a “more realistic attitude” to valuations.
“Enough time has passed since 2021 that things will have to start unraveling,” she added.
