Small cap IPOs may see a modest rebound in the second half of 2025, as structural shifts in the market, regulatory headwinds, and macroeconomic uncertainty make a return to past high levels unlikely, according to Bank of America.
Companies are staying private longer, debuting at larger sizes, and facing higher profitability expectations, analysts noted.
Tighter regulations and investor focus on quality over growth have reshaped the IPO landscape, Bank of America highlighted, particularly in sectors like healthcare and software.
What’s more, macro and policy uncertainty and accompanying volatility could hold back activity near term, according to Bank of America, with analysts suggesting that many companies may delay their public debuts until there is greater political and regulatory clarity.
As companies opt to remain private for longer, public small-cap companies are becoming "older and less growthy," says Bank of America. The median Russell 2000 stock is now 13 years old and has a consensus long-term growth rate of 13%, compared to six years and over 20% growth in the 1990s.
Regulatory headwinds remain a key factor limiting IPO activity. The analysts pointed to the lasting impact of Sarbanes-Oxley, which contributed to the decline in IPOs from around 500 per year in the 1990s to approximately 150 annually in recent years. And recent rules or proposals from some index providers to increase liquidity or other requirements also limit smaller IPOs, analysts noted.
No 2020-style boom
The report highlights the stark contrast between today’s IPO environment and the surge seen during the 2020 to 2021 period, which was fueled by low interest rates and pandemic-related stimulus.
"2020 to 2021’s IPO boom was a period of COVID stimulus and record low interest rates where non-profitable (companies) proliferated,” analysts wrote, noting the trend was “unlikely to repeat.”
Notably, only about 10% of de-SPAC IPOs from that period are still trading today.
Sector-specific insights reveal that while healthcare has dominated the recent IPO resurgence, further recovery may be gradual. In the biotech sector, IPO performance has improved but remains mixed, with investors focusing on validated clinical data and late-stage assets. In software, investor interest in IPOs is high, especially for companies demonstrating high and durable growth.
Artificial intelligence remains a focal point, though IPOs of AI solution startups with smaller teams are projected to be a few years away.