In an unexpected turn of events, the global initial public offering (IPO) market has shown remarkable resilience amid a period marked by economic slowdown, geopolitical tensions, and financial market volatility. According to the latest EY Global IPO Trends report for Q3 2024, IPO activity surged 11 percent compared to the previous quarter, driven by improved investor sentiment and the gradual easing of interest rates.

While the year-over-year numbers indicate a contraction, with a 14 percent drop in the number of IPOs and a steep 35 percent decrease in proceeds, the quarter-over-quarter increase points to a recovery in the IPO landscape. Companies have become more optimistic, seizing opportunities as inflationary pressures recede and borrowing costs diminish.

Easing Interest Rates Offer a Path to Recovery

The global IPO market’s resurgence comes on the back of favorable changes in monetary policies by central banks. Over the past few quarters, central banks in key economies, including the U.S. Federal Reserve, European Central Bank (ECB), and Bank of Japan, have signaled a more dovish stance by either pausing or gradually lowering interest rates. Lower interest rates decrease the cost of capital, making it more attractive for firms to raise funds through IPOs. This has particularly benefited sectors that rely on debt financing, as borrowing costs have come down, providing an incentive for more companies to go public.

“While challenges remain, such as geopolitical risks and market volatility, the easing of monetary policy by major central banks has provided much-needed relief to companies seeking to raise capital,” said Julie Teigland, EY’s EMEIA Area Managing Partner.

This optimism is reflected in the third-quarter IPO uptick, which could signal the beginning of a longer-term recovery in the global IPO market as investor confidence strengthens. Historically, IPO markets tend to benefit from lower interest rates as reduced borrowing costs lead to higher valuations and better market conditions for companies going public.

Americas and EMEIA Regions Outperform as Asia-Pacific Falters

Regionally, the Americas and the Europe, Middle East, India, and Africa (EMEIA) regions were the standout performers in Q3 2024, while the Asia-Pacific region struggled.

In the Americas, 57 IPOs were completed, marking a 39 percent increase from 41 IPOs in the same period last year. However, despite the higher volume, the total proceeds dipped slightly by 8 percent, from $9.2 billion to $8.4 billion. The region now accounts for 18 percent of global IPOs, up from 11 percent last year, and an impressive 34 percent of global IPO proceeds, compared to 24 percent in Q3 2023. This growth is largely attributed to a robust pipeline of tech companies and energy firms that continue to attract investor interest.

Meanwhile, the EMEIA region recorded 144 IPOs, a 20 percent jump from 120 IPOs in Q3 2023. Despite this increase in activity, the total proceeds dropped from $8.2 billion to $6.9 billion, representing a 16 percent decline. EMEIA accounted for 47 percent of all global IPOs in Q3 2024, up from 34 percent the previous year. The region’s strong showing was primarily driven by IPOs in sectors such as industrials and materials, which have been more resilient to economic fluctuations.

In stark contrast, the Asia-Pacific region saw a significant downturn, with only 109 IPOs in Q3 2024, a sharp decline of 45 percent from 198 IPOs in Q3 2023. Proceeds fell even more dramatically, dropping 54 percent from $20.9 billion to just $9.6 billion. The slowdown in China’s economic growth, combined with tighter regulatory conditions, has weighed heavily on the region’s IPO market.

Cross-Border Listings on the Rise

One notable trend in the global IPO market is the increasing number of cross-border listings, where companies choose to go public on exchanges outside their home country. In the first three quarters of 2024, 77 companies opted for cross-border IPOs, marking a 20 percent increase year-over-year.

The U.S. market, in particular, has seen a surge in foreign listings, as companies from Europe, Asia, and even Latin America flock to American exchanges, drawn by favorable market conditions, high liquidity, and attractive valuations. Since 2023, foreign-domiciled issuers have accounted for about 52 percent of IPOs on U.S. exchanges. Notable examples include tech startups from Southeast Asia and energy companies from Latin America, seeking to tap into U.S. investors’ appetite for growth.

In response to this growing trend, stock exchanges around the world have been adapting their listing requirements. For instance, the Hong Kong Exchange recently relaxed its IPO requirements to attract tech firms, while the UK introduced significant reforms aimed at making London more competitive in the global IPO market. These changes reflect the shifting dynamics of the global financial markets, where flexibility and adaptability are becoming key factors for attracting listings.

Sector-Specific IPO Performance

The IPO market’s performance has also varied significantly across sectors. Companies in less capital-intensive industries, such as industrials, materials, and energy, have shown greater resilience to rising interest rates and economic uncertainty. These sectors have benefited from stable demand, government spending on infrastructure projects, and the energy transition driving demand for renewable energy investments.

On the other hand, sectors heavily reliant on financing, such as healthcare, technology, and real estate, have struggled due to higher borrowing costs. Healthcare and tech, which had been the darlings of the IPO market in recent years, experienced a marked slowdown in IPO activity as interest rates soared. However, as central banks continue to lower rates, these sectors are poised for a comeback, with renewed investor interest and several high-profile IPOs already in the pipeline.

The Growing Role of AI in IPO Markets

One of the standout sectors for future IPO activity is artificial intelligence (AI). The rapid development of AI technologies has captured investor attention, and nearly 50 AI-related companies are currently in the IPO registration process. These companies are at the forefront of innovation in machine learning, automation, and data analytics, and are expected to drive significant investor interest in the coming quarters.

The AI sector has already seen substantial venture capital investment, and its companies are now reaching maturity, making them prime candidates for IPOs. Market analysts expect the AI IPO boom to continue into 2025, as advancements in AI applications across industries such as healthcare, finance, and logistics create new growth opportunities. Some industry experts believe AI could be the catalyst that drives the next major wave of IPOs, similar to the tech boom of the late 1990s and early 2000s.

Looking Ahead: What to Expect for Q4 2024 and Beyond

As the year draws to a close, the outlook for the global IPO market remains cautiously optimistic. Much will depend on macroeconomic conditions, particularly inflation trends and central bank policies. If interest rates continue to fall and inflation remains under control, it could pave the way for a strong finish to the year, with more companies opting to go public in Q4 2024.

Geopolitical risks, such as ongoing conflicts and trade tensions, could still pose challenges, but the overall sentiment in the market appears to be improving. Key upcoming events, such as elections in major markets and the evolution of central bank policies, will likely play a pivotal role in shaping IPO activity going into 2025.

Sectors such as AI, technology, and renewable energy are expected to dominate the IPO landscape in the coming quarters, while more traditional industries may face greater challenges. Nevertheless, the global IPO market’s ability to adapt and thrive, even in the face of economic headwinds, demonstrates its resilience and capacity for recovery.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

10th October, 2024