According to Renaissance Capital (here), in the heady days during the two-year period 2020 and 2021, 618 traditional U.S. IPOs were completed, raising over $220 billion. (These stats do not include SPAC IPOs). By contrast, in the period 2022-2023 YTD, there have only been 171 traditional U.S. IPOs completed, raising just $27 billion. While many market observers yearn for a return of the buoyant IPO market that prevailed two years ago, signs are that it could be a while before the IPO market takes off again. As detailed in a November 14, 2023, Wall Street Journal article about the state of the IPO market, and as discussed below, there are a host of concerns weighing on the IPO market.

While the downturn in the number of IPOs since 2020-2021 is significant, the U.S. IPO market during 2023 YTD actually improved compared to 2022. Thus, there have been 100 traditional U.S. IPOs during 2023 YTD, raising $19.3 billion, there were only 71 during full-year 2022, raising just $7.7 billion. But while the IPO market has at least improved this year compared to last year, analysts, investment bankers, and others had actually hoped for more this year.

Four high-profile companies completed IPOs earlier this year – Arm Holdings, Instacart, Klaviyo, and Birkenstock — raising hopes that these companies’ offerings might pave the way for other companies to go public. These four offerings, which the Journal describes as “blockbuster IPOs,” were completed to great fanfare, and, as the Journal noted, “all priced their IPOs at the high end of or above expectations and initially traded higher.”

Unfortunately, the subsequent performance of these four companies’ stocks has been “disappointing.” Three of the four now trade below their IPO prices; the fourth, the chip designer Arm Holdings, is trading just above its offering price. The poor post-offering performance of these companies “has likely shut the door for the remainder of 2023.”

A host of reasons explains the doldrums that the IPO market has been in since the frothy days of 2020 and 2021. The prior boom quickly turned into a bust after the Federal Reserve started raising interest rates in March 2022, particularly as the tech company share prices began to slide. Perhaps even more significantly, the overall performance of the stocks of the nearly 800 companies that have completed offerings since January 1, 2020, has been poor. More than 80% are currently trading below their offering price. Investors, according to the Journal, simply “don’t want to get stuck with more underwater offerings.” And finally, high interest rates offer attractive investment alternatives with less risk.

What might it take for the IPO market to rebound? The Journal suggests at least two possibilities. First, “the performance of recent IPOs has to improve to pave the way for new offerings.” Second, the current stock market volatility has to ease. The Journal notes that the IPO market has often slowed or stopped altogether during times of significant stock market swings.

The downturn of the IPO market over the last two years has had a number of consequences. For example, private companies that were on a trajectory toward an IPO have now had to defer or even abandon the idea. The Journal notes that the healthcare payments company Waystar, which had aimed to complete an IPO in 2023, has now delayed its IPO, likely until 2024.

The IPO bust over the last two years has also had an impact on the D&O Insurance market. The hard market for D&O insurance that prevailed during the period 2019-2021 attracted new capital and a number of new players into the space. This new capacity came online fully in 2022, just as the bottom was falling out of the IPO market, and as the market for SPAC IPOs dried up as well. The absence of traditional IPO and SPAC IPO opportunities meant for D&O market participants, including both established players and new markets, that the only way to win business is to compete for existing accounts. The result has been a swift decline in the pricing for public company D&O insurance.

While a number of insurance market commentators have publicly decried the swift decline in D&O insurance rates, there are few signs that the market dynamic will support an upward bounce in rates. Among many factors operating against rate firming is the continued absence of new business opportunities, due in part to the continuing weak market for IPOs. For now at least, it looks as if the market for traditional IPOs in the U.S. will not provide significant new business opportunities for the D&O insurers.