Image Source: Kevin Smith on Flickr

Three months into 2025, the U.S. IPO (initial public offering) market remains in a rut. Why? And, perhaps just as importantly, is a rebound still possible?

Drawing on our unique relationship with underlying managers, we’ll shed some light on the latter question by tapping into the views of specialist managers. But first, let’s take a step back and examine the potential reasons for the slump.

Decrease in IPOs

Recent volatility aside, equity market returns in the U.S. have been strong in recent years, with the Russell 1000 rising by more than 20% in both 2023 and 2024—and in five of the past six calendar years. Valuations for U.S. companies are (broadly) within the upper band of their historical valuation ranges, indicating increased investor confidence in the prospective outlook. That constructive backdrop of strong returns and relatively high valuations would normally be a close-to-ideal environment for companies to come public via an initial public offering (IPO), providing an exit for early backers and increased liquidity for employees.

That, however, is not what has transpired. As can be seen in the below chart, IPOs in 2022, 2023, and 2024 were all well below the long-term annual average of ~$50 billion in capital raised (exclusive of ‘blank check’ special purpose acquisition companies). While there is a noticeable cyclical pattern to capital raised in IPOs in the chart, there is also an accompanying correlation with underlying market returns. Case-in-point: Prior highwater marks in 1999/2000, 2014, and 2021 all followed extended periods of strong market performance.


Capital raised in IPOs

Source: Financial Times, Dealogic.

Behind the decline

So, what is different this time? Two key factors:

• First, in contrast to prior cycles, the strong market performance since year-end 2022 has predominantly been driven by larger stocks, with the large cap Russell 1000 rising at more than twice the rate of the small cap Russell 2000 in recent years. Even after taking into account recent volatility, large cap stocks continue to trade near all-time highs while small cap stocks are still languishing below their early 2021 levels. With smaller companies usually representing much of the IPO pipeline, market conditions for going public are perhaps less favorable than they might at first appear.
   
• Second, companies are staying private longer than before for a multitude of both internally motivated and market environment reasons. These include an SEC-driven increased regulatory and expense burden for public companies, and a desire by founders to retain control. Likewise, the growth of private equity firms into today’s giants—and the resultant ready availability of capital—has given companies that would previously have had no choice but to go public a sizable alternative source of funding.

What gives?

Active equity managers, particularly quality-focused small cap managers who had historically relied on the IPO market to act as a conveyor belt of new opportunities, have had to contend with these challenging dynamics for years. In partnering with these preferred managers, we are able to share the insights below, detailing their views on the current environment for IPOs and what it might take for more companies to go public.

• Small cap managers described the current environment as at least partially a ‘hangover’ from the post-Covid boom in equity issuance in 2021. In particular, they pointed to the more speculative offerings of special purpose acquisition companies (essentially blank check companies intended as a financing vehicle to acquire other listed companies), many of which underperformed following their listings.
  
  The more speculative environment and increased investor appetite in 2021 also had the side effect of ‘bringing forward’ the IPOs of less mature, riskier companies, leaving a reduced pipeline for subsequent years. After three relatively weak years for new offerings, managers are cautiously optimistic that higher quality companies will decide to come public, although recent offerings are not confidence-inducing.
   
• Large cap and small cap managers alike pointed to the steadily increased regulatory burden for companies to go public (including rules added after the 2021 boom) as an added disincentive to list.
  
  Increased direct listing costs, higher associated legal fees, added obligations for senior executives, and additional reporting expenses were all cited as hindrances to all but the largest candidate companies undertaking an IPO. While there is hope that a changing of the guard at the SEC could crack open the door to lower regulation, companies so far are broadly taking a wait-and-see attitude to any prospective regulatory changes.
   
• Managers also pointed to the increased role played by private equity firms in providing capital for growing companies that previously would have had no choice but to tap the public markets.
  
  As private equity and private credit have become more mainstream asset classes accessible to a wider segment of underlying investors, the amount of capital managed by the largest PE firms has grown considerably, enabling them to invest ever-larger amounts in later-stage private companies. Yet, while PE’s asset base has grown, the underlying mechanics and cyclicality of fundraising and realizations have not, as the chart below shows. Broadly speaking, active equity managers believe the now long-in-the-tooth nature of some earlier PE fund vintages and the need for exits from maturing investments will help to revive the market for IPOs later this year and next.

Source: Goldman Sachs

The bottom line

Capital markets exist to provide a venue and mechanism for price discovery and capital raising. As they always have, the markets will continue to evolve to meet investor needs.

At Russell Investments, we believe investors benefit from taking a long-term view and a diversified approach to portfolio construction. True to our multi-manager heritage, we build portfolios with those principles in mind, providing access to the value creation opportunities identified by our preferred managers across a wide spectrum of both public and private strategies to achieve client investment goals.

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