Thawing IPO Market Sparks Cautious Optimism Among Dealmakers

Dealmakers in venture capital and private equity are feeling optimistic about a thaw in IPOs and mergers after a period of tough conditions. Venture capital and private equity firms enjoyed a period of regular mergers and acquisitions and a strong IPO pipeline in the years following the 2008 financial crisis, but this trend began to decline in 2022 and continued through 2023 as markets became more risk-averse with rising interest rates, inflation, and geopolitical uncertainty. This decline has resulted in a low distribution rate to venture capital fund investors, leading to a decrease in fundraising by US VC firms. However, there are signs of improvement, with rebounding M&A activity and an increase in IPOs in 2024. While the IPO market is showing signs of life, with 22 companies already going public this year, none of the high-profile private companies have emerged with deals yet. Market volatility and a risk-off sentiment remain concerns for IPOs, and there is a need for deals to be discounted to attract buyers. Despite these challenges, there is cautious optimism as the market adjusts to factors such as interest rates, inflation, political landscape, and economic uncertainties. Investors, however, remain cautious, favoring safer names over new ventures. While the environment is challenging, venture capital firms have performed well in the years following market downturns, and some are waiting for a better IPO environment before taking portfolio companies public. The rise of profitability over growth has led to lay-offs in the tech sector, and companies with $500 million to $1 billion or more in revenue and 20% growth, either profitable or near-profitable, are more attractive to investors and analysts. However, ongoing geopolitical uncertainties and the US presidential election may delay IPO plans until late 2024 or 2025. The regulatory environment and compliance costs for going public have also hampered growth.