The decline in initial public offerings (IPOs) from 2022 was impacted by sharp rate increases that caused a market selloff. Despite the market recovery in 2023, with the Nasdaq-100 ending near all-time highs, the IPO market remained slow.
We used updated data from Jay Ritter because it has a longer history. He recorded only 153 U.S. equity market IPOs in 2023, a decline from the 175 IPOs in 2022 and a stark contrast to over 1,000 in 2021. However, we note that Ritter places ADRs, companies with an IPO price under $5, special purpose acquisition companies (SPACs), REITs, banks, unit offers, and partnerships or trusts in the “other” (light green) category.
Exchange-traded funds (ETFs) are also excluded from this analysis; for information on ETF trends and returns in 2023, see Hot ETFs in 2023.
Chart 1: New IPOs continued falling from the 2022 market selloff
Remember, 2023 saw interest rates continue rising, with the Fed increasing short-term rates by another 100 basis points to above 5.5%. However, most of the rate increases occurred in 2022, and with peak rates in view and hikes paused since the end of summer, stocks rallied in 2023.
Interestingly, although the IPO market remained slow in 2023, capital raising increased significantly. We estimate a total capital raised of $20 billion (excluding SPACs), compared to $6 billion in 2022.
In addition, 11 reached market caps of over $1 billion on their first trading day (more than in 2016 and 2009). The most notable 2023 IPOs include:
- ARM Holdings, which raised $4.87 billion with a first-day market cap of $65 billion (although note ARM is an ADR, so it is included in the light green data).
- Instacart parent company Maplebear Inc. (ticker CART), which raised $600 million and reached a first-day market cap of $9.3B.
- Birkenstock Holding (ticker BIRK), which raised $1.48 billion with a first-day market cap of $7.55 billion.
- Application software company Klaviyo Inc. (ticker KVYO), which raised $576 million and had a first-day market cap of $8.25 billion.
Looking at it in more detail, 2023 ended much stronger than it started, putting IPOs on track to keep raising more capital in the year to come.
Chart 2: IPOs raised more capital in 2023
Based on our data, Nasdaq listed 83% of all new 2023 IPOs. In addition, Nasdaq IPOs raised the most capital, raising $3.3 billion more than other exchanges and reached a higher first-day market cap by $23 billion.
Chart 3: Over half of operating companies listed on Nasdaq
Day-one returns were below average but better than 2022
Ritter’s data shows the day-one IPO return (return of the stock from the overnight institutional placement price to the close on the first day of trading, also called the IPO-pop) from 1980 through 2023 averages 18.9%.
Chart 3 below shows that the 2023 median return (where the light and dark grey boxes meet) is less than 1%, well below average but in line with 2022. However, last year, we saw more than half of the companies rally on their first day of trading, with a much more positive skew to returns than in 2022.
Remember that 2020 (average day-one returns of over 40%) and 2021 (average day-one returns of around 20%) returns occurred when interest rates were near zero.
Note that Chart 3 excludes the few IPOs with a market cap under $1 million or an offer price under $5.
Chart 4: Distribution of IPO first-day returns
During the last two years, the median return was close to 0%. This isn’t the first time IPO markets had low median returns. We also saw it coming out of the credit crisis in 2008-2010, with median returns of 1%.
Longer-term returns were also historically weak but better than 2022 IPOs
For a buy-and-hold investor, it is also interesting to look at what happened after day 1.
Overall, IPOs typically hold their gains after day one – and even rally slightly toward the end of their first year (grey bars in Chart 5).
The past two years have seen among the weakest IPO returns in the first month after listing. Although the 2023 IPOs saw one of the lowest open pops, they didn’t revert as much as some other years (purple line). The largest 2023 IPOs even outperformed the S&P 500 by 18%.
The long-term performance of 2020 IPOs stands out. They saw a median first-day pop of more than 20%. The 2021 IPOs also performed relatively well at the start of their listing; however, a year after listing, bond markets were already pricing in coming rate hikes from the Fed, which created a headwind for all stocks.
Chart 5: 2023 IPOs fared slightly better in the long run than 2022
SPAC spike subsides
The other thing that changed in 2023 is the rate of SPACs significantly declined. We counted 28 new SPACs, a sharp decrease from the 86 SPACs in 2022 and 610 SPACs in 2021.
The average completion rate from 2008 to 2019 was 77%. Importantly, SPACs typically have two years to find a target for acquisition, making it hard to compare SPACs that launched over the past 24 months. However, data shows that over half, 51%, of 2022 SPACs and 21% of 2023 SPACs have now found a target and either completed or announced a deal.
Chart 6: Count of SPACs per year
Perhaps more interesting is that 60 SPACs from 2020 and 249 SPACs from 2021 have now been liquidated.
From the past three years, only 148 SPACS are still looking for a target (orange color in Chart 6). Ninety-five are from 2021. As SPAC managers typically have just two years to find a deal, there is a risk that we will see even more liquidations in the 2021 column.
SPAC prices still spike after a deal
It’s well known that SPACs tend to IPO at a price of $10. Without operating income or expenses, they should stay around that price until a deal is announced. After that, the fundamentals of the target and the economics of the deal also matter to valuations.
Looking at the prices of SPACs in each stage of their lifecycle, we see that:
- Active SPAC: Most active SPACs are trading very close to $10 (the grey boxes in Chart 7 represent half of all tickers, while the high and low crossbars include over 85% of all tickers). The median price of active SPACs is $10.04, although 6 Active SPACs have prices above $20 while two also have prices below $7.
- Deal Announced: We do see more variation in prices for SPACs after a deal is announced, and the median price rises slightly to $10.37. Even still, there are 17 SPACS with deals announced priced over $20 (representing 2.7% of this category).
- De-SPACed: When a deal is announced, prices vary even more. Although the median price of completed deals, at $10.28, is consistent with announced deals, there are more completed deals whose price has fallen below $10 (76, representing 11% of this category). Historically, we have seen PIPE investments at the close, which would bring investment capital, especially if investors withdraw money from the SPAC as it completes. However, as de-SPAC performance declined, the PIPE market dissipated, making it challenging for companies to raise additional capital in this process.
Chart 7: Most SPAC prices are still around $10
SPACs were also smaller in 2023
Perhaps not surprisingly, the SPACs we have seen since 2021 have also been much smaller. As the data in Chart 8 shows, the median SPAC in 2023 fell to just $68 million (well below the median 2020 high of $240 million).
Chart 8: 2023 saw less SPACs with smaller amounts raised
Looking to 2024
With interest rates expected to fall in 2024, markets at or near all-time highs and data showing private equity funds have been holding investments much longer than normal, the IPO market should, finally, have some tailwinds in 2024.
That would also be good for public investors, increasing their access to new innovations and growth companies, along with the transparency that listed companies provide, as individuals look to secure their own financial futures.
Nicole Torskiy, Senior Economic & Statistical Research Analyst, contributed to this article.
