At the Jackson Hole Economic Symposium, Federal Reserve Chair Jerome Powell made the case for cutting its key interest rate by 25bps. While economic data has continued to send mixed messages with persistent inflation and relatively low unemployment, the August labor market report highlighted downside risks to the employment picture. This should seal the case for an easing of the Fed funds rate and more importantly, set the stage for further reductions over the remaining meetings this year and into 2026.
The shift in monetary policy marks a change in direction for the central bank after holding rates steady for the last nine months. Furthermore, the Fed’s transition from a restrictive stance toward a more neutral position has generated optimism for a resurgence in IPO activity and continued strength in the equity markets. The hope is that rate cuts will pre-empt any downturn and foster a stable and growing economy.
The Impact of Rate Cuts
Interest rates are a fundamental driver of financial markets and play a pivotal role in the capital formation process, affecting the cost, availability and demand for capital, in addition to influencing investor sentiment.
The U.S. IPO market has been slow in recent years. Data shows that the number of deals greater than $50MM (excluding SPACs) fell from a record high of 320 in 2021 to 21 the following year. The numbers have since ticked up but have not yet returned to historical averages; in 2024 there were 69 such IPOs versus a 15-year average of 140 (per CMG DataLab). Following tariff induced volatility, activity has picked up in 2025, and expectations are growing that the current momentum could dovetail with rate cuts to instigate even greater IPO volume.
Although it can take time for the impact of interest rate cuts to flow through the economy, the transition to a lower rate environment could present a highly favorable backdrop for the IPO market for a number of reasons:
- Lower borrowing costs reduce interest expense and allow for growth investments. They also make it more affordable to invest in operational infrastructure and initiatives that drive growth and innovation. This not only relates to existing businesses but also encourages new ventures to enter the market. In addition, lower borrowing costs allow companies to refinance existing debt obligations on more favorable terms, thereby improving cash flow generation and earnings.
- Lower cost of capital increases the value of future cash flows. As rates fall, so does the discount rate used to value future cash flows, making them more valuable today.
- Lower returns from bonds and savings accounts drive demand for equities. Investors in pursuit of higher returns take on greater risk by allocating more capital to equities, including IPOs, and away from fixed income and interest-bearing accounts. This greater demand for equities tends to drive up share prices.
- Higher market valuations resulting from stronger corporate earnings, lower discount rates and greater demand for riskier assets. Since 1982, the S&P 500 has delivered an average return of 11% in the year following initial rate cuts over the last 10 cycles.
What to Expect in the Near-Term from the IPO Market
To determine what future IPO activity in the U.S. market might look like as rates decline, it’s important to understand what has been working in the current environment as well as the characteristics of a successful IPO candidate. Year-to-date, the technology and financial services sectors have led the way, accounting for 46% of IPO volume and 57% of total proceeds raised. In addition, both sectors have generated offer-to-current returns greater than 30%. Given the disruptive nature of such companies, the limited exposure to tariff threats and the tailwinds behind AI, fintech and crypto, it’s not surprising to see such performance. More recently, however, we have seen broader sector participation with consumer, industrials and biotech IPOs pricing and trading well.
Businesses that have the best chance of listing and performing well post-IPO are those with scale, stability, profitability, attractive growth prospects and strong management teams, as well as those positioned to benefit from mega trends, deregulation and increased foreign direct investment. On the other hand, sectors that are capital intensive, or those with the potential to be impacted by tariffs, immigration policy, supply chain disruptions and geopolitical volatility may lack margin and earnings visibility and thus have a higher bar to clear. That said, we see a more favorable interest rate environment benefiting both these sectors.
IPO activity can be sensitive to a range of factors, however the Federal Reserve announcement may very well bring renewed optimism to the market.
Time-to-Market Optionality is Key
Taking a company public is a critical event for any business and requires meticulous planning and preparation while threading the needle from a timing perspective to launch during a favorable market window. The most successful IPO processes start well before bank syndicates are selected and S-1s are drafted. Companies considering an IPO can take steps today to get ready. In fact, most successful public companies took deliberate steps to begin acting like a public company more than a year before embarking on the IPO process
Our Equity Capital Markets Advisory (Locust Hill Advisors, A Kroll Business) is here to bring high-touch, bespoke service and best-in-class execution to the IPO process. We act as an in-house equity capital markets banker, guiding our clients through each stage of the process to drive exceptional IPO outcomes. In uncertain markets, companies should get ready early and hit the market when conditions are favorable. If you’re considering an IPO or have any questions about the IPO process, we’re here to help.
