Dynamics shift as the influence of interest rates recedes and new factors emerge
Elevated interest rates have significantly influenced IPO activity during the recent phase of high inflation and monetary tightening. As inflationary pressures diminish and the need to bolster economic growth becomes a priority, a global interest rate easing cycle has commenced, with advanced economies at the forefront. Lower interest rates and the easing of inflationary pressures could offer some relief to companies looking to go public by reducing the cost of capital and encouraging investment in new ventures. With increased clarity around interest rate policies, their direct influence on the IPO market trajectory may start to fade, allowing other factors to play more pivotal roles in shaping the IPO landscape. Economic headwinds and geopolitical risks might temper enthusiasm for public offerings in certain sectors and across continents, while policies from the election super cycle could add layers of complexity to the IPO decision-making process.
In August 2024, the Cboe Volatility Index (VIX), commonly known as the “fear index,” surged to its highest level in more than four years. This spike was driven by a confluence of market forces, including weakening job reports and economic indicators, escalating geopolitical tensions, volatility in technology stocks, and an increasingly contentious US presidential race. Additionally, the interest rate hike by the Bank of Japan disrupted the yen carry trade, amplifying volatility and further unsettling global markets.
US-China market value gap reaches record high
A pivot in monetary policy has investors diverting capital from cash and low-yield bonds to more appealing asset classes, such as equities. Geographically, investors have been shifting capital from slowing economies, such as China, or geopolitically unstable countries to more promising markets, including the US and India.
Despite looming recession concerns, the US market remains the more stable and attractive option for global investors. In year-to-date (YTD) 2024, the market capitalization disparity between the US and China has reached an unprecedented high. The US market continues to outperform global peers, even with strong growth in countries like India and Japan in recent years. Elevated liquidity and valuation multiples, particularly in recent quarters, have strengthened investor confidence in high-profile transactions, including mega IPOs.
So far this year, mega IPOs showed a clear trend toward recovery compared to the previous year, along with a consistent resurgence of PE-backed exits via IPOs. Americas led in the listings of mega deals, driven by substantial foreign listings and significant domestic offerings, including the standout IPO (US$5.1b) from Lineage, Inc. This could reflect more willingness by large businesses to enter the market while investors continue to focus on high-quality deals.
The number of unicorn IPOs decreased from 13 in the first three quarters of 2023 to eight in the same period of 2024, with tighter liquidity and higher capital costs playing a key role in the decline. Ahead of the US Federal Reserve's rate cut in late September, its first major cut in more than four years, investors remained cautious, favoring companies with strong fundamentals. Investors have also grown more prudent in the wake of underwhelming post-IPO returns from several high-profile unicorn debuts in 2023. This has led some unicorns to pause before going public until market conditions improve. Interestingly, the one area of acceleration is venture capital (VC)-backed exits through unicorn IPOs, with five unicorns raising a total of US$3.7b, compared with just two in the same period last year, which raised US$1.3b.
Cross-border listing momentum heightened
The floodgates for cross-border listings have swung open. In the first three quarters of this year, 77 companies chose to list overseas—which included cross-border deals within the Americas, Asia-Pacific, and EMEIA regions—an increase from 64 during the same period last year. This represented a 20% YOY increase and accounted for 9% of global IPOs this year. Since 2023, approximately 52% of IPOs on US exchanges have been from foreign-domiciled issuers, hitting a 20-year high. While this percentage is partially caused by the generally low volume of IPOs in the last two years, it highlights a growing trend of international companies choosing US markets for their listings. In 2024, the robust US market attracted more listings from Mainland China, Hong Kong, Singapore and Australia compared with last year, though deal sizes were smaller. As US-China audit agreements eased delisting fears, Chinese firms have stopped pursuing Swiss listings, preferring the US for its liquidity and more advantageous valuations. Large cross-border deals, however, were dominated by Europe, with two mega transactions listed in the US and one in the Netherlands.
While cross-border listings have continued to gain momentum, stock exchanges are tailoring their listing regimes with varying degrees of changes to accommodate the evolving business landscape, where traditional financial metrics may not fully capture a company's value or potential.
In 2024, the UK introduced its most significant listing reforms in decades, aiming to make London more competitive with markets such as New York. Effective from September 2024, the Hong Kong Exchange (HKEX) also eased listing requirements to encourage IPOs of specialist technology firms and de-SPAC transactions.
Valuation metrics like price-earnings (P/E) ratios play a critical role when companies choose their listing destination. A higher P/E ratio signals stronger investor interest and can indicate a market’s optimism about future growth. This can make certain exchanges more attractive depending on the industry and prevailing market conditions. P/E ratios are relatively high in the US, India and the Middle East, making them favored destinations for IPO candidates and investors.
Broadening of IPO sectors opens doors to more diverse investor opportunities
Monetary policy shifts have significantly influenced IPO activity across various sectors since the COVID-19-induced expansion of the money supply in 2020. During the period of monetary tightening from early 2022 to the first half of this year, marked by higher interest rates, sectors less impacted by rate fluctuations, such as industrials, materials and energy, demonstrating resilience in public listings. Conversely, capital-intensive sectors that are more affected by the cost of borrowing, such as health and life sciences, technology, real estate, and financial services, experienced a notable decline in their global shares.
As interest rates decrease, most of these sectors have seen a resurgence in IPO activity in the first three quarters of this year. Lower rates reduce the cost of capital, making it more appealing for companies in these sectors to raise funds. As the easing cycle begins and other factors take precedence, we are witnessing a gradual broadening across sectors, leaving room for more diversified investment opportunities for buyers.
IPO pipelines signal sustained AI enthusiasm
In the past two years, more than 60 artificial intelligence (AI) companies have gone public annually, with about half turning a profit. Despite similar revenue sizes, those listed in the last 12 months have achieved nearly double the market capitalization of companies listed the previous year. Approximately 50 AI companies are currently in IPO registration; about one-third are profitable. This trend reflects sustained investor interest in AI-driven innovations, despite challenges around profitability.
Q4 2024 IPO market outlook
The remainder of 2024 is expected to see the IPO market influenced by central bank policies, geopolitical developments and key election outcomes. Optimism is fueled by lower interest rates and easing inflation, which are likely to encourage new listings and a resurgence in sectors sensitive to borrowing costs. Strong performance in key markets such as the US, Europe and India is expected to continue. Cross-border listings should continue to thrive, and significant public debuts, especially those backed by PE firms and from spin-offs and carve-outs, are anticipated as they seek favorable public entry points.
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Summary
The global IPO market in Q3 2024 showed cautious optimism despite a 14% dip in year-over-year volumes and a 35% drop in proceeds. EMEIA demonstrated resilience with a 45% increase in IPO proceeds. The IPO landscape is evolving as interest rates ease, with sectors like health and life sciences gaining momentum. Cross-border listings are thriving, while AI-driven IPOs continue to capture investor interest.