IPO market nears peak as valuations hit 20-year high

Low interest rates and hefty returns have driven record demand for IPOs, but with valuations for newly public companies now at levels last seen during the dot-com bubble, some analysts are raising concerns that boom may be nearing an end.

Last quarter was the U.S.'s biggest for initial public offerings in over two decades, with 115 companies raising proceeds of $40.7 billion, according to Renaissance Capital. IPOs also set a record in the first quarter.

In 2020, companies raised $61.9 billion, the most since 2000, according to a measure by Jay Ritter, a finance professor at the University of Florida.

This demand has driven valuations to levels not seen since the dot-com bubble two decades ago. In 2020, investors valued IPOs at a median of 38 times the company's revenue, close to the nearly 41x valuation seen in 2000, according to Ritter. Those valuations have begun to drop in 2021, but remain historically high.

Enthusiasm from companies and investors drove the number and overall proceeds higher in the first half of the year, but returns are slipping and that could further temper pricing for IPOs

The IPO market took off partly because historically low interest rates made stocks an attractive investment, even as the pandemic sapped the broader economy. Those low rates can help boost returns for companies going public.

Low interest rates are especially beneficial for technology stocks whose rich valuations are based on high expectations for their future earnings. Technology companies were dominant in the second quarter, with China-based ride-hailing company Didi raising more than $4.4 billion. Mobile gaming company AppLovin raised $2 billion when it went public in April. The tech sector accounted for more than half of the quarter's billion-dollar IPOs.

The average...