Bankers believe a string of companies could follow Reddit into the US stock market in the coming months, after the social media group's shares jumped 48 per cent on its debut.
A steady and sustained rise in activity would breathe life into the IPO market, which has been largely shut down since 2021.
This week, the Reddit company sold $748 million worth of shares priced at the top of its suggested range, and its shares rose on the New York Stock Exchange as trading opened. A day earlier, shares of artificial intelligence infrastructure group Astera Labs rose 72 percent in their Nasdaq debut. The company raised $713 million.
“We see these deals as a good sign of the strength and depth of the market, and that's what we tell clients,” said Rob Stowe, head of US capital markets at Barclays. “If these conditions continue, it will push out some people who were on the cusp of making deals this year.”
Strong deals in Europe added to the mood, with listings for companies such as German defense contractor Rink and Athens International Airport rising after their debuts on the market.
On Friday, investors were further encouraged by a 21 percent debut gain for EQT-owned Galderma, which also priced its shares at the top of its range. The Swiss dermatology giant has raised 2 billion Swiss francs ($2.2 billion) in the largest European offering since Porsche's debut two years ago.
A sustained reopening of the IPO market could boost the animal spirit of dealmakers in general as well as ease pressures on private equity firms that typically rely heavily on IPOs as a means of exiting investments. One banker described the success of the Galderma deal as a “relief of relief” for private equity.
However, deal flow is likely to be more steady than the deluge seen in the last boom, which ended in early 2022.
“There is fundamental demand from investors but only at the right price and for companies with good stories,” said Achintya Mangla, head of global capital markets at JP Morgan. “To build a really good foundation for the IPO market, we still need to see the performance of this year's IPOs three or six months out.”
Since 2021, when companies sold $154 billion worth of shares in the United States as the broader market rose, New York IPOs have collectively raised just $36 billion, according to Dealogic data. Deals were also smaller, raising an average of $151 million, less than half of 2021's $388 million.
Confidence in the potential of IPOs has been boosted by the recent market rally. The S&P 500 rose 19 percent in six months, while volatility — a threat to potential floats — remained low. The Federal Reserve this week raised its forecast for economic growth, increasing investor confidence that corporate profits can continue to grow.
“To move forward with an IPO, management must be confident in the economic backdrop and expected performance of its business — that confidence is starting to improve,” said Eddie Molloy, co-head of Americas capital markets management at Morgan Stanley.
Among the companies expected to go public soon include cold storage chain Lineage Logistics, which is seeking a valuation exceeding $30 billion, and cybersecurity provider Rubrik, which was valued at $4 billion last year.
Healthcare payments software group Waystar filed for an IPO in November, but ultimately backed out.
Listings expected soon in Europe include Golden Goose backed by Permira, the Italian luxury sneaker brand, and Puig, the Spanish beauty and fashion group behind brands including Charlotte Tilbury.
Bigger US prizes to come include Nvidia-backed software group Databricks, which was valued at $43 billion in a funding round last year, and payments group Stripe, valued at about $50 billion.
Investors have so far shown the most interest in more mature companies that are profitable, or that can convince potential buyers that they will soon be profitable.
David Ludwig, global head of ECM at Goldman Sachs, said investors remain cautious about valuations.
“The amount of time they spend with quality companies ahead of potential listings is constructive,” he added.
“Companies need to show growth and a path to profitability. Investors are very willing to deploy capital, but they are still very disciplined and provide us with very detailed valuation ideas,” said Keith Canton, head of ECM for the Americas at JP Morgan.
Preparing to go public takes several months, which means companies just starting the process could debut in the fall at best. If there is volatility around the US presidential election in November, that could push some into 2025.
“If the market remains constructive, it will attract more companies to the IPO process,” said a senior financial markets management specialist. “We were anticipating a gradual reopening in 2024, and then if activity continues to accelerate, we will head into 2025 with a larger pool of companies and a more normal IPO market.”
Additional reporting by Evan Livingston
