IPO watchers are pinning hopes for recovery on a strong stock market and the AI boom

Published Mon, Jan 22 20248:41 AM ESTUpdated Mon, Jan 22 202410:11 AM EST

The 2024 IPO season is starting off the same way the 2023 ended: with glimmers of hope based on the market rally and an enduring belief that artificial intelligence-themed IPOs will begin appearing later in the year. The good news: Markets are at new highs, interest rates have been trending lower, initial public offering filings have been modestly active, and there is hope the calendar is going to pick up. "We are very encouraged by the filing activity, but our enthusiasm has been kept in check by the market," Matt Kennedy, senior strategist at Renaissance Capital, told me. You can't blame him: After a strong close to 2023, the S & P 500 is up a little over 1% for the year, closing at a new high. Yet the main IPO exchange-traded fund, the Renaissance Capital IPO ETF ( IPO ), has been for sale most of the month. "For the IPO market to open up, it would help not to have our IPO ETF down 9%," he said. A few modest ETFs have come through in the first weeks of January On Friday, Kaspi (KSPI), a Kazakhstan-based "super app" that offers online banking and ecommerce through an app, began trading on the Nasdaq. It sold 11.3 million American Depositary Shares at $92, raising just over $1 billion, and closed up 4%. Homebuilder Smith Douglas floated 7.7 million shares at $21 on Jan. 11 with a market cap of $1.1 billion, and is up 15% since. Still, when you consider that the last IPO that generated real interest was Birkenstock, way back in early October, the lack of big deals is frustrating. "There are a hodgepodge of IPOs in the last few months, but not a clear, compelling narrative," Don Short, head of venture equity at InvestX, told me. Some modest deals are already on the calendar BrightSpring Health, a home and community-based health-care service, is scheduled to begin trading at the Nasdaq this Friday. It is seeking to sell 53.3 million shares at a price range of $15 to $18, which at the midpoint would raise about $880 million, with a $3.4 billion market cap. Amer Sports is kicking off its roadshow today, offering 100 million shares at a price range of $16.00 to $18.00, which at the midpoint would raise $1.7 billion. The company owns several well-known international sports brands, including Arc'teryx, Salomon, Wilson, Atomic and Peak Performance and is scheduled to begin trading on February 1 at the New York Stock Exchange. The valuation overhang is still a problem Last year, IPO watchers lamented the "valuation overhang," the haircut that many IPOs had to take after higher rounds of funding in 2021 and 2022 put premiums on companies that the public investing community was unwilling to support. The result: Many companies decided they didn't want to, or couldn't afford to, go public. "Most of the companies are still off from their last round of financing, many by more than 50%," Short said. "They are having trouble getting momentum established again." Howe Ng, head of analytics and investment solutions at Forge Global, agrees. Forge Global maintains a Private Market Index , a measure of 75 late-stage pre-IPO companies. It was down 20% last year. "This tells you valuations are getting reset in the private market," Ng told me. Ng said Forge Global is hopeful the index will turn positive, because that will be an indication that private investors are getting more bullish, and it increases the chances of more IPO activity. Some companies have filed, but there are a lot more hopefuls A number of companies have filed confidentially to go public, meaning the filing is placed with the SEC but cannot be seen by the public. Companies that have filed confidentially include ServiceTitan, which provides software for residential and commercial heating, social forum network Reddit, canned fruit maker Del Monte, restaurant chain Panera Bread, online ticket marketplace SeatGeek, Chinese fast-fashion retailer Shein and cryptocurrency issuer Circle. Reddit is firming up plans to go public this quarter, but it has been on file for over two years, according to Reuters . Auto rental marketplace provider Turo filed publicly, as did health-care payment firm Waystar. Waystar was set to go public in November but delayed its IPO and will reportedly wait until 2024. But there are far more "hopefuls" that are rumored to be interested but have not made formal filings. That list includes payments firm Stripe, and buy now/pay later service provider Klarna, whose CEO told CNBC in November it is "pretty much ready" for an IPO. Some smaller companies with public brand recognition (canned water company Liquid Death) could also dive in, as could Kim Kardashian's shapewear brand, Skims. Can AI save the IPO market? When all else fails, IPO watchers are pinning their hopes on the idea that a wave of small AI-themed IPOs will sweep the markets in 2024. Often mentioned as IPO hopefuls are cloud analytics firm Databricks, as well as Rubrik, a cloud data management and enterprise platform backed by Microsoft. Gaming-focused voice chat service and social network site Discord is also frequently mentioned as an IPO candidate, as is cloud security provider Wiz, which raised $300 million last year in a Series D round of financing that valued the company at $10 billion. While these firms may be candidates, Short says there are two big problems with placing faith in a wave of tech IPOs. First: "There are thousands of small AI startups out there, but the growth and profits are way off for most of them," which would make floating an IPO difficult, even in a bullish AI environment, Short said. Second, for those AI firms that are larger with more revenues and profit potential, there is an escape valve available to them: the shareholder tender. Private companies face significant pressure to go public as a way to pay off investors and employees. Many employees sell shares in the private market, but companies are looking for some way to control the amount of stock sold privately and the prices the stock sells for. Enter a shareholder tender. Instead of employees trying to sell stock privately on a one-off basis, the company gathers all the interested shareholder sellers together, and gets one or more general partners to buy up the stock. "It's an organized process to get employees liquidity and takes pressure off the company to go public, and the company gets more control over pricing and timing," Short said. Short noted that SpaceX, Databricks, Canva and OpenAI have all done shareholder tenders. Ng at Forge Global said that due to the immense faith in AI as a disruptive innovator, many tech companies may be able to weather the IPO winter, at least those that can claim some plausible connection to AI. "There are a lot of small AI companies, but they are not interested in going public because they are getting plenty of funding in the private markets and they don't want to risk getting a valuation haircut in the public market," Ng said. The investors in tech startups still want to cash out For everyone else, there is the continuing threat of valuation haircuts. Still, there is an enormous amount of trapped wealth in tech startups that has been generated in the last decade. "The VC [venture capital] firms and their LPs [limited partners] who have invested in these startups are increasingly in need of a return given the massive amount of value created in these verticals, meaning the prospect of a reopened IPO window in 2024 is extremely appealing," Vincent Harrison, a senior analyst for venture capital at PitchBook, wrote in a recent note to clients.