As major indexes continue to charge ahead to new year-to-date highs, the long-standing drought among new IPOs entering the market might soon be coming to a close.
"We do see a light at the end of the tunnel," Matt Kennedy, Senior IPO Market Strategist for Renaissance Capital, told CNBC's Bob Pisani on "ETF Edge" on Monday. "All the pieces are finally in place for pickup in the second half."
Kennedy's firm runs the Renaissance Capital IPO ETF (IPO), which tracks the performance of newly public company stocks. Its largest holdings include Snowflake, Airbnb, Palantir and DoorDash.
The fund has outperformed the S&P 500 this year, up 30% compared to the benchmark's nearly 14% gain, as of Tuesday's close.
"Outperformance is the fuel that powers the IPO issuance engine," Kennedy said. "If returns hold up, activity should gradually return."
According to Renaissance Capital, holdings in the IPO ETF cycle out three years after being listed on the market. The fund is also rebalanced each quarter to incorporate new IPOs. Kennedy said that the newly offered Kenvue (KVUE) and Cava, which launches on Thursday, will be eligible for addition to the fund.
On Monday, Cava, which operates Mediterranean fast-casual restaurants in the U.S., raised its IPO valuation target to $2.23 billion, priced between $19 and $20 per share. The company had earlier targeted up to $2.12 billion.
While a stronger market helps pave the way for additional IPO issuance, Kennedy explained that the boost to potential valuations like Cava's acts as a key indicator for additional candidates to more confidently price their own.
"They're anxiously watching the market, looking at dynamics like this," he said. "And I think that that looks like a green light for them."
The 10-year average of capital raised for new initial public offerings is $55 billion, but only $7.7 billion was raised last year, according to Renaissance Capital. Nearly the same amount has already been raised so far this year ($7.3 billion), fueling anticipation that the market is finally getting back on track.
And with IPOs from Fogo de Chao, Reddit, Instacart and chip manufacturer ARM in the pipeline, and potential offerings from names like Panera Bread, Stripe, Impossible Foods, StubHub and Klarna, Kennedy said he sees the momentum only building in the current market environment.
"It has to be a string of successes," he said. "By the end of the year, we are hoping for a much more normal looking market. And certainly, heading into 2024, if these returns hold up."
