With mixed second-quarter bank earnings under our belt, there is a better sense of how capital markets may unfold over the second half of the year. Messages were somewhat mixed, but there is an underlying optimism that merger and acquisition activity may pick back up as the Fed gradually reduces its policy rate over the months and quarters to come. What's more, an ample amount of dry powder in the private equity space, to the tune of $3.20 trillion in the value of unexited companies, could spark dealmaking as we look ahead to 2025.[1]
The regulatory backdrop matters...
Unavoidable is the topic of the upcoming U.S. general election. By the looks of polling data and what betting markets suggest, there has been a rising chance that Republicans may control not only The White House, but also both houses of Congress.[2]
If that comes to pass, many pundits assert that the regulatory environment would turn more lax, possibly setting the stage for an uptick in corporate consolidation and new companies taking the bold step of going public through the initial public offering process.
...But the buck might stop with the Fed
Investors must understand that predicting both what the Federal Reserve does and how Washington D.C. is reshaped after key elections is fraught with risk and uncertainty. All it takes is one new macro risk to shift sentiment both on Wall Street and on Main Streets across America. For now, let's focus on what is already trending; and we have good news on that front.
Positive data trends
The second quarter of 2024 marked the first year-over-year increase in new global IPOs since the third quarter of 2021 and the single most active quarter since the third quarter of 2022. It was by no means a renaissance of private companies testing the public markets, but 84 total new issues was an impressive jump from 46 IPOs in the same period a year earlier.
We are nowhere close to the rash of companies going public three years ago during the era of zero-percent interest rates, but the downtrend off the first-quarter 2021 peak has clearly halted, as measured by the four-quarter moving average flattening out in the chart below.
IPO count inflects positive in second quarter, the window may be opening
Source: Wall Street Horizon
Second-quarter bank earnings and calls paint a brighter picture
It's possible that after two years of generally tight financial conditions and banks that have been focused on avoiding significant risks, there's a flood of young companies seeking to exit via the IPO process, though Preqin reports that the first half of 2024 featured a five-year low in private equity exits.[3] But bank executives are ready to go.
During the first week of earnings season, JPMorgan Chase (JPM, Financial) reported one of its best quarters in years for merger deals and other capital market activities, including debt underwriting.[4] Wells Fargo (WFC, Financial), while not as prominent as JPMorgan, recorded a 38% surge in revenue from investment banking fees in the second quarter. Citigroup (C, Financial) posted a 60% increase in the same category last quarter with its chief financial officer, Mark Mason, telling reporters after the conference call that the pipeline of announced deals looks strong, potentially through 2025.[5]
Will companies take the jump?
Now we just need animal spirits to reinvigorate small and medium-sized companies. A tailwind for nervous CEOs of private enterprises is that IPO performances so far in 2024 have been decent. Among the most high-profile new issues is Reddit (RDDT, Financial), which debuted last March. Shares of the social network firm are up more than 90% as the broader Communication Services sector had been a relative winner, at least through early July.
Other strong IPO stocks this year include Astera Labs (ALAB, Financial), which has returned more than 50%, Viking Holdings (VIK, Financial), up 46% since late April, and even Rubrik (RBRK, Financial) is back in positive territory after stumbling off the starting block. The notable laggard is Ibotta (IBTA, Financial); the mobile tech company helping shoppers snag deals at the grocery store has seen its stock price dip 23% after its first day of trading in the early second quarter.
Major 2024 IPO stock performances
Source: Stockcharts.com
Upcoming IPO candidates
Looking ahead, the docket of potential IPOs is notable, but still not indicative of a high risk appetite. StubHub (which recently delayed its IPO plans) and Stripe are two of the more recognizable names.[6] Other candidates might include Databricks, Fanatics, Chime and Klarna. A name that is absent from that list, for now, is the Chinese fashion retailer Shein.
Facing many regulatory hurdles and intense public scrutiny regarding national security concerns, Shein's chances of a U.S. IPO were seen as extremely low as recently as a month ago. But the e-commerce giant continues to grab market share from large domestic retailers as it grows its U.S. presence.[7] It might be just a matter of time before it may seek to go public. Last month, it filed papers to list in London later this year, but even that has encountered backlash for the company's supposed exploitation of workers, unfriendly environmental policies and sidestepping tax obligations.[8]
The bottom line
It has been a rocky few years for Wall Street bankers seeking to launch IPO roadshows and collect fees from new companies going public. Moreover, restrictive monetary policy and a hangover from perhaps too much fun having taken place in late 2020 through 2021 continue to cast heavy shadows over capital markets. The tide could be turning, at least that's the tone from executives at the largest banks. The broad trend of IPO counts by quarter appears better, however, and investors might have some exciting new stocks to analyze in the quarter ahead.
1 Global Private Equity Report 2024, Bain & Company, July 18, 2024, https://www.bain.com
2 Election eightball: See how much 2024 presidential odds have swung toward Trump, USA Today, Jim Sergrent, July 16, 2024, https://www.usatoday.com
3 M&A Midyear Report 2024: Dealmakers Mine Multiple Sources of Value, Bain & Company, David Harding, Dale Stafford, Suzanne Kumar, July 9, 2024, https://www.bain.com
4 Dealmaking Reignites for Banks Just as Consumers Start to Falter, Bloomberg, Jennifer Surane, Hannah Levitt,Todd Gillespie, July 12, 2024, https://www.bloomberg.com
5 Wall Street banks see investment banking improvement, with some caution, Reuters, July 12, 2024, https://www.reuters.com
6 StubHub Delays IPO Launch Due to Choppy Market Conditions, The Wall Street Journal, Corrie Driebusch, July 12, 2024, https://www.wsj.com
7 Experts say Shein's U.S. IPO is all but dead, CNBC, Ece Yildirim, June 21, 2024, https://www.cnbc.com
8 Campaigners urge UK government to block Shein's London IPO, Reuters, July 17, 2024, https://www.reuters.com​
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