Why Is the IPO Market Struggling? Here’s What Active Managers Have to Say

Key takeaways:

Strong returns in U.S. stocks, particularly over the past two plus years, have led investors to question the relative lack of companies going public via the IPO process—as well as the potential implications for the IPO market in the long term.
According to active equity managers, a combination of increased public market regulation, a reduced pipeline of potential offerings following the prior boom, the rising role of large private asset managers in capital raising, and near-term uncertainty surrounding government policy are all contributing factors.
At Russell Investments, we think investors benefit from taking a long-term view. We construct portfolios with this in mind, building in the right blend of public and private assets to achieve client investment goals.

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

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.

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.

Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

The Russell logo is a trademark and service mark of Russell Investments.

This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

A message from Advisor Perspectives and VettaFi: Register for the Fixed Income Symposium and navigate an uncertain rate environment.