After a two-year hiatus, the IPO market is showing signs of life, with private equity firms seizing the opportunity to take their portfolio companies public.
This year has witnessed several notable IPOs, including those of Douglas, Reddit, Birkenstock, and the Swiss pharmaceutical company Galderma, as well as Luxembourg-based CVC Capital Partners PLC in Amsterdam. The outcomes have been mixed. Douglas and Reddit struggled out of the gate, their shares trading below initial offering prices. In contrast, Galderma, which was spun off from L’Oréal and Nestlé, saw its stock price soar a month after its debut. CVC made a splash last Friday, with its shares surging more than 20% on their first day of trading.
«Equity markets have stabilised somewhat this year,» said Koen Ronda, head of private markets investments at IBS Capital Allies. «Consequently, there’s renewed interest in public listings.» Broad-based price gains across various market segments, including small and mid-caps, are encouraging for private equity, which typically invests in these areas before a public float, he said.
«The number of IPOs hasn’t returned to levels seen a few years ago, but there’s a gradual return to normalcy.»
Urgent need for exits
The holding period for investments in private equity portfolios has extended, with recent data from PitchBook indicating an average duration of 6.2 years, up from a historical average of 5.6 years, said the IBS expert. For instance, CVC held a stake in Douglas for nine years before floating it on the Frankfurt stock exchange in March. European private equity firms now manage assets totalling 1,100 billion euro, combining existing investments and 250 billion euro in unallocated capital.
«The need for exits is pressing, yet the IPO remains a crucial strategy,» Ronda said, pointing out the generally higher multiples achieved on stock exchanges compared to private sales.
Diverse exit strategies
Recent challenges have made other exit avenues less attractive for private equity firms. Resales to other equity firms or strategic buyers have dwindled, partly due to inflation concerns. «However, these routes are gradually reopening,» Ronda said.
He remains optimistic. «Central banks are likely to moderate their interest rate hikes, easing market concerns and aiding in the stabilisation of investment exits,» he said.
Recent IPOs seen as ‘mixed bag’
Ronda describes recent IPOs as a «mixed bag.» «We’ve yet to see standout successes, but it’s premature to draw firm conclusions,» he said. Factors like limited float have dampened attractiveness for investors, as seen with Douglas. Moreover, pre-IPO financial restructuring, such as the capital injection into Douglas by CVC, highlights ongoing caution around debt levels.
«Some companies, like Birkenstock, don’t capture immediate investor interest, while others like Reddit are still proving their technological promises,» Ronda said. «It’s been challenging to fully endorse any business models that have gone public in the last 18 months.»
More IPOs on the horizon?
Following the successful floats of Galderma and CVC, Ronda anticipates more companies will pursue IPOs. «We might see Bol.com on the Damrak soon. It’s a formidable business, though unlike private equity, Ahold doesn’t face the same urgency due to fund timelines,» he said.
As private equity firms navigate expiring funds, their well-stocked portfolios suggest a vibrant future for public listings.
Further reading on Investment Officer Luxembourg:
A Nasdaq in Luxembourg? ‘I beg you. Build it.’
CVC Capital now eyes 2024 for new attempt to go public