IPOs Set the Scene for Private Equity Companies to Get Exit-Ready
A flurry of IPO activity in September has raised hopes of an improved listing environment for private equity and venture capital backed businesses and set the stage for an increase in exit activity in the final quarter and into 2024. While listings are focused on the U.S., which appears to be managing inflation and the economic downturn better than many other markets, there are indications that some European IPOs could be around the corner.
The decline in private equity exit activity stabilized in the second quarter of 2023 as activity improved. U.S. private equity exit value jumped by 67% on the prior quarter to $87.3bn in the three months to the end of June, the first increase after four consecutive quarters of decline, according to PitchBook data1. European exits rose more modestly by 29% to €68bn, yet similarly signaled increased success for firms looking to divest large assets2. Amid the improvement, IPOs remained conspicuous in their absence. PwC research showed that EMEA listings raised just $9.6bn in the second quarter, dominated by the listings of the UAE’s ADNOC gas and separate logistics businesses on the Abu Dhabi Securities Exchange3.
A flurry of IPO activity in September has raised hopes of an improved listing environment for private equity and venture capital backed businesses and set the stage for an increase in exit activity in the final quarter and into 2024. While listings are focused on the U.S., which appears to be managing inflation and the economic downturn better than many other markets, there are indications that some European IPOs could be around the corner.
The decline in private equity exit activity stabilized in the second quarter of 2023 as activity improved. U.S. private equity exit value jumped by 67% on the prior quarter to $87.3bn in the three months to the end of June, the first increase after four consecutive quarters of decline, according to PitchBook data1. European exits rose more modestly by 29% to €68bn, yet similarly signaled increased success for firms looking to divest large assets2. Amid the improvement, IPOs remained conspicuous in their absence. PwC research showed that EMEA listings raised just $9.6bn in the second quarter, dominated by the listings of the UAE’s ADNOC gas and separate logistics businesses on the Abu Dhabi Securities Exchange3.
Arm Gives Listing Confidence a Boost
September heralded a step change in activity and expectations of a thawing IPO market. UK-based chip designer Arm Holdings listed on New York’s Nasdaq at the top end of its price range, giving the company a valuation of over $52bn and raising about $4.9bn for owner SoftBank4.
Arm’s flotation coincided with the announcement of price ranges for other closely watched tech names, including marketing automation company Klaviyo and grocery delivery group Instacart. In each of the three cases, the businesses set their public price ranges below their last private valuation round. However, Arm’s shares jumped by as much as 25% on their debut, raising confidence that high-quality companies could get a positive reception – and that public investors could also enjoy some valuation uplift from new listings. The company’s shares have since fallen though, providing a reminder that there are still headwinds.
For tech companies, including those created and headquartered in Europe, the Nasdaq exchange remains the preferred listing venue due to the concentration of company peers and tech-focused investors. However, there are signs that companies in sectors that command less lofty multiples are also drawn to the U.S. rather than European markets.
German sandal maker Birkenstock filed to float on the New York Stock Exchange at a valuation in excess of $8bn, almost double the level at which L Catterton acquired the business in 20215. With the S&P 500 up more than 17% year-to-date compared to 7% for Europe’s Stoxx 600 and just over 1% for the FTSE 100, sponsors are clearly seeking to tap the potential for higher valuations and stronger share price performance in the U.S., driven by more liquid markets and higher trading volumes.
Arm Gives Listing Confidence a Boost
September heralded a step change in activity and expectations of a thawing IPO market. UK-based chip designer Arm Holdings listed on New York’s Nasdaq at the top end of its price range, giving the company a valuation of over $52bn and raising about $4.9bn for owner SoftBank4.
Arm’s flotation coincided with the announcement of price ranges for other closely watched tech names, including marketing automation company Klaviyo and grocery delivery group Instacart. In each of the three cases, the businesses set their public price ranges below their last private valuation round. However, Arm’s shares jumped by as much as 25% on their debut, raising confidence that high-quality companies could get a positive reception – and that public investors could also enjoy some valuation uplift from new listings. The company’s shares have since fallen though, providing a reminder that there are still headwinds.
For tech companies, including those created and headquartered in Europe, the Nasdaq exchange remains the preferred listing venue due to the concentration of company peers and tech-focused investors. However, there are signs that companies in sectors that command less lofty multiples are also drawn to the U.S. rather than European markets.
German sandal maker Birkenstock filed to float on the New York Stock Exchange at a valuation in excess of $8bn, almost double the level at which L Catterton acquired the business in 20215. With the S&P 500 up more than 17% year-to-date compared to 7% for Europe’s Stoxx 600 and just over 1% for the FTSE 100, sponsors are clearly seeking to tap the potential for higher valuations and stronger share price performance in the U.S., driven by more liquid markets and higher trading volumes.
Industrials and Local Champions Consider European Exchanges
While the largest listings of global tech leaders and international brand names focus on the U.S. market, there are indications that European exchanges are also opening up for new listings. German industrials group Renk, which makes gearboxes for Leopard tanks and is owned by Triton, is said to be preparing its IPO price range for early October6. Similarly, privately-owned German glassmaker Schott AG is reported to be planning the float of its medical glassware division Schott Pharma at an expected valuation of about €4bn7. Both companies are targeting the Frankfurt Stock Exchange, which hosted the listing of web services group IONOS in February.
Industrials and Local Champions Consider European Exchanges
While the largest listings of global tech leaders and international brand names focus on the U.S. market, there are indications that European exchanges are also opening up for new listings. German industrials group Renk, which makes gearboxes for Leopard tanks and is owned by Triton, is said to be preparing its IPO price range for early October6. Similarly, privately-owned German glassmaker Schott AG is reported to be planning the float of its medical glassware division Schott Pharma at an expected valuation of about €4bn7. Both companies are targeting the Frankfurt Stock Exchange, which hosted the listing of web services group IONOS in February.
Other private equity-backed companies are considering IPOs – or dual track processes – for leading businesses. Among them, Cinven, EQT and Canadian pension fund CPPIB are said to have hired banks for a potential listing of Spanish leisure group Hotelbeds8, while Apax, EQT and Oakley Capital are reported to be exploring the IPO of Idealista, the leading real estate portal in Spain and Southern Europe9.
IPO activity in the UK has been more muted, with London listings eclipsed by both Milan and Istanbul in the first half, PwC data shows10. Faced with the loss of major companies – such as Arm – to the U.S., the London Stock Exchange is investigating innovations to attract more young companies. Among those is an “intermittent trading venue” to allow shareholders to sell holdings in private start-ups and scale-ups, with plans allowing for 12 such auctions a year11. A major challenge will be ensuring enough liquidity to enable shareholders to achieve exits – or partial exits – at fair value for their stakes. However, if successful, the plan could boost the attractiveness of the UK market to unicorns and other large start-ups, and potentially create a route for eventual listings on the main market.
Other private equity-backed companies are considering IPOs – or dual track processes – for leading businesses. Among them, Cinven, EQT and Canadian pension fund CPPIB are said to have hired banks for a potential listing of Spanish leisure group Hotelbeds8, while Apax, EQT and Oakley Capital are reported to be exploring the IPO of Idealista, the leading real estate portal in Spain and Southern Europe9.
IPO activity in the UK has been more muted, with London listings eclipsed by both Milan and Istanbul in the first half, PwC data shows10. Faced with the loss of major companies – such as Arm – to the U.S., the London Stock Exchange is investigating innovations to attract more young companies. Among those is an “intermittent trading venue” to allow shareholders to sell holdings in private start-ups and scale-ups, with plans allowing for 12 such auctions a year11. A major challenge will be ensuring enough liquidity to enable shareholders to achieve exits – or partial exits – at fair value for their stakes. However, if successful, the plan could boost the attractiveness of the UK market to unicorns and other large start-ups, and potentially create a route for eventual listings on the main market.
Exploring All Exit Options
The partial exit afforded by IPOs can enable private equity and venture capital backers to share in any future upside in company performance and share prices. That opportunity has to be set against the certainty provided by full exits to corporates and other private equity firms which can facilitate much-needed distributions to investors. Other options, such as minority stake sales, are becoming increasingly common as some sponsors look to generate liquidity without losing control of their businesses.
The current environment is also creating opportunities to take money off the table while preparing for eventual exits. We have seen an increase in refinancings as private equity firms reset and renegotiate debt packages to extend maturities. Those new financings are typically attached to higher coupons. However, where companies have used cash flows to pay down a portion of borrowings, and company performance has improved, there can be headroom for sponsors to increase debt levels and take money off the table in the form of dividends.
Refinancings can create other advantages as private equity firms prepare company data for lenders that can also be used for data rooms and exit due diligence. As markets recover, we expect to see more companies becoming “exit-ready”. Having the house in order enables a quicker move to an auction process or dual track, as well as “softer” processes that could enable rival firms to make pre-emptive bids for assets before sales launch officially.
Current conditions favor quality assets that can create competitive tension and achieve attractive valuations. However, with some buyers still preferring the sidelines, the path to greatest value may yet lie in holding on for better markets and improved sector valuations.
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