The US IPO market continues its downward spiral in 2024, with only 151 listings so far. While on track to top the decade in 2023 at 154 IPOs, it has yet to recover from a dramatic decline in 2022, which saw US IPO deal volume drop 83 percent from a record high of 1,035 in 2021. will kick off the IPO market, but Jay Ritter, a finance professor at the University of Florida, cautioned against that prospect at the time, telling Yahoo Finance, “I don’t think there will be a boom.” So far, it seems you’re right. “It was one game. “There’s been a lot of attention because of the retail interest,” Ritter told the Observer, adding that many companies seeking IPOs, almost anything in the business-to-business space, are not as recognizable as Reddit’s (RDDT) brand.
However, given the booming stock market, Ritter added, “I continue to be surprised that there isn’t more IPO activity happening right now. The stock market is hitting record highs.” Rather than looking to the market for answers, the reason companies don’t go public may be that the nature of IPOs has changed dramatically.
By 2021, only three out of ten companies that raised money through an IPO made a profit—a dramatic drop from nine out of ten in 1980. In addition, 26 percent of IPOs had a two-tier share structure in 2021, compared to only 1.4 percent in 1980.
“Back in the 1980s, it was as much of a sell-off market as it had been for the last 20 years or so,” Ritter noted. Today, a company seeking to raise capital through an IPO typically secures more bonds with institutional investors, who are more willing to take the risk of backing unprofitable companies than retail investors. Meanwhile, companies often issue two-tier shares, which give certain shareholders more voting power, allowing company insiders to retain control even after the IPO. This property is very attractive to institutional investors.
IPOs also fail to generate much excitement due to market inefficiencies. Renaissance Capital’s FTSE Renaissance US IPO Index, which tracks the stock prices of companies that have gone public in the past three years, has been lagging behind the major equity indices over the past five years.
Big unicorns like SpaceX, valued at $210 billion, and Stripe, valued at $70 billion, have no known plans to go public. Instead, these private companies have been selling shares in the secondary market, where they can still raise capital from private investors. Pitchbook describes SpaceX as “the darling of secondary markets.” Secondary markets have exploded, and funds in the space are up 92 percent from what they were by 2023, according to Bain & Co. This gives them a lot of money to fund pre-IPO startups.
Even if the IPO market recovers, it is uncertain whether retail investors will benefit. While institutional investors get a profit from the first day’s offering, retail investors usually have to buy at the marked price. The most promising startups are sold in secondary markets, where retail investors do not usually have direct access due to high capital requirements. The two-tier share structure is widespread and deprives the selling shareholders of any meaningful influence on the company’s decisions.
