'Stars are aligning' for the IPO market in 2024: Strategist

The IPO market could be ready for a big year in 2024 after a dismal 2023, with companies like Reddit, Skims, and Shein expected to go public. Renaissance Capital Senior Strategist Matthew Kennedy joins Yahoo Finance to comment on the expectations for Reddit and Shein public listings, and the overall optimism for IPOs in 2024.

"These past few years have built up a bottleneck of companies, that pipeline of IPOs has grown and grown. More companies want to go public. We've seen IPO filings reflect that," Kennedy says.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

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AKIKO FUJITA: The IPO market is looking to regain its momentum after rate hikes, bank failures, and geopolitical tensions placing pressure on prospective issuers. With several highly-anticipated public offerings expected this year, including Reddit and Rubrik, we're checking in on the path ahead for the IPO market. Let's bring in Matthew Kennedy, Renaissance Capital senior strategy-- strategist, to discuss.

Good to talk to you today. Let's start with Reddit here, because this is an IPO that has been three years in the making, at least when you consider the delays. The fact that they are likely to come to market finally, what does that tell you about where the appetite is in the market right now, especially around tech IPOs?

MATTHEW KENNEDY: Right. So as you know, the market has been dormant for two years. But I think as Reddit shows us, the-- the stars are aligning for a solid pickup in 2024 and 2025. We've already had a good start to the year in terms of activity. We do expect to see that number rise towards the end of the quarter and heading into the more active summer months. And that includes Reddit. I think the demand is there for companies that can offer strong growth and an inflection point on profitability. And I think that's what Reddit will pitch.

RACHELLE AKUFFO: So Matthew, just to take a step back then, give us your base case as to why you think it's actually going to-- the IPO appetite is going to pick up in 2024?

MATTHEW KENNEDY: Right. So first and foremost, last year we saw a strong recovery in our IPO index that's tracked by our IPO ETF, ticker IPO. In addition, the S&P 500 hit an all-time high. Investors are willing to put money back to work. On the company side, that means higher valuations in public markets than any point since 2021. More and more VC-backed tech IPOs can avoid down rounds. Tech unicorns have spent two years getting to profitability, many are at that inflection point. And these past few years have built up a bottleneck of companies. That pipeline of IPOs has grown and grown. More companies want to go public. We've seen IPO filings reflect that, public filings, confidential filings, pockets of activity from biotech, insurance, fintech, health care.

So the interest rate environment is another area. There's a lot of-- a lot of reasons why we expecting 2024 to be a big market. Interest rates are maybe a little bit of uncertainty there, but at least, we're not rising. That's definitely a positive.

AKIKO FUJITA: And Matthew, how much of this also has to do with what's been playing out in the VC space and the private funding side of things? You mentioned the down rounds that we saw. Instacart came public last year, but it was one of those companies that saw a down round prior to listing. Is the reality here that it's better to come to the public markets because the funding on the private side isn't as abundant right now?

MATTHEW KENNEDY: Absolutely. There was basically no harm in staying private for as long as possible back in 2021 when private markets were so generous. That is not the case anymore. So for companies that need capital, the public markets are certainly looking a lot more attractive right now.

I think there's other reasons companies are starting to look to go public in 2024 as well. I wouldn't think that it's only that reason. I think fundamentals is probably a strong one for Reddit. I think that they probably had a very decent 2023. They can probably point to improving trends. So that means growth and profitability. CEO did say that he expects to achieve breakeven in 2024. So that's very important. They've probably built out their ad platform. Maybe some advertisers have shifted money from X to Reddit. Maybe they'll highlight their data as a play on AI. Maybe they'll get ad dollars ahead of the 2024 US election. So I think there's a lot of reasons why they're choosing to go public right now.

Also pure trading. I mean, if you look at Snap, Pinterest-- you saw what happened with Meta, had an all-time high. So they could continue to wait for a perfect market, but there's a lot of green lights right now that just point to a better market than anything they've seen in the last two years. And like you said, they have been waiting a while.

RACHELLE AKUFFO: And Matthew, I have to ask you about Shein, could potentially be one of the biggest IPOs that we see this year. What are the chances of this coming to fruition, and what are some of the things that you're going to be watching in terms of headwinds, especially as, you know, there's obviously still some scrutiny for some of these companies based in China?

MATTHEW KENNEDY: Right. So Shein is one of those companies that had been at the top of our list for most anticipated IPOs of 2024 in terms of its valuation. I think that had been a big, big driving factor, what people are expecting. But it seems like the headlines have just been one negative after the next, whether it's coming from US regulators' or Chinese regulators' concerns about the environment.

So they'll have to overcome those various negatives and headwinds and convince investors. I'm not saying they can't do it. I think that like any company, if you pitch a clear and compelling story and an attractive valuation, that'll get some eyeballs. But yeah, they do have an uphill climb based on what we've seen, especially since there are other IPO candidates out there too.

AKIKO FUJITA: Matthew Kennedy from Renaissance Capital, it's good to talk to you today. Really appreciate the time.

MATTHEW KENNEDY: Thank you.