Citi sees some tech companies still weighing US IPOs this year

A HANDFUL of tech companies are considering going public on US exchanges during the last three months of the year, a top Citigroup banker said, stoking the pipeline of potential initial public offerings (IPOs).

A burst of such listings would be welcome news to bankers who have already begun downplaying expectations for the rest of 2024, given the risk of market volatility stemming from the US presidential election, signs of an economic slowdown, and uncertainty over how swiftly the Federal Reserve will start cutting interest rates.

But Paul Abrahimzadeh, Citigroup’s co-head of equity capital markets for North America, said last week that the tech companies could potentially benefit from demand for high-growth stocks, which are seen as more resistant to economic slowdowns and whose valuations typically benefit from lower rates.

“Those are businesses that should elicit a strong reception, regardless of potential macro disruptions in the US,” he said on the sidelines of the bank’s annual tech conference in midtown Manhattan.

The pace of US IPOs has jumped to US$32 billion so far this year, more than double what it was last year, after companies seized on a stock-market rally that until two months ago continued pushing major indexes to new record highs.

Still, the volume of IPOs this year is a fraction of the more than US$240 billion seen during the same period in 2021, before the Fed’s rate hikes. It’s also below the average seen in the decade before the pandemic, data compiled by Bloomberg show.

Banks including Citigroup – the top-ranked global IPO underwriter so far this year – are looking for activity to ramp up in 2025. That’s in part because of an increase in pre-IPO companies meeting with potential advisers, Abrahimzadeh said.

The lack of urgency, however, may reflect the recent stock-market volatility and the slide among some newly listed companies whose results failed to top investors’ expectations. While the biggest IPOs have largely fared well, the broader performance has varied, with Reddit gaining 65 per cent and Ibotta down over 40 per cent.

Even in cases where deals have priced above marketed ranges or the number of shares for sale has been boosted, the perception that companies were being taken public at aggressive valuations during this year’s advance has prompted sharp declines when companies’ earnings fell short of sometimes lofty expectations.

“Deals in the high-growth, high-multiple sectors have garnered considerable excess demand due to scarcity value, and in many cases were priced to perfection,” Abrahimzadeh said. “The buy-side is justifying aggressive valuations in the IPO market due in large part to anticipation of beat-and-raise results, which can lead to volatile aftermarket performance if companies are unable to live up to investor expectations.”

The widespread expectation that the Fed will start cutting interest rates next week – and continue doing so into next year – may help to spur some new IPOs, particularly if the economy continues to avoid a recession. The swaps market is pricing in that the central bank’s benchmark rate – now in a range of 5.25 to 5.5 per cent – will be cut by a full percentage point by December and be dropped to roughly 3 per cent by mid-2025.

“The reality is there’s no lack of demand for new issues,” Abrahimzadeh said. “Growth is back en vogue and that will only accelerate as rates go lower.” BLOOMBERG