There are two pertinent problems the private equity industry is currently faced with: exit markets have dried up and LP demand for liquidity is at an all-time high.
While the secondaries market offers a welcome reprieve for managers looking to hold on to assets for longer periods, it’s a finite resource.
GP-led transaction volume rose last year, reaching $51 billion, up from $48 billion the prior year, according to data from investment bank Evercore’s FY 2023 Secondary Market Survey Results. This is a drop in the ocean for total private markets assets under management, which reached $11.7 trillion as of June 2022, according to McKinsey.
It’s no wonder market participants are hunting around for further innovation to capture liquidity while potentially maintaining a hold over their best assets.
Enter private IPOs.
Northern European alternatives firm EQT’s chief executive has publicly championed the concept. Most companies in the US are now private, Christian Sinding told affiliate title Private Equity International last week. Furthermore, due to the prevalence of index funds and ETFs, just a fraction of public market players buy into IPOs – typically hedge funds that are typically unable to be long-term owners.
“At the same time, the private ownership model is great,” Sinding said. “We have clear governance, we work very closely and well with boards and management team… some companies don’t necessarily need to be public.”
Theoretically, where the firm has a company that it has high conviction in and believes it has runway for long-term ownership, EQT could create a market in that company either among its 1,200 institutional investors or beyond, Sinding said.
The only complicated part is setting a price, he added. Given a typical IPO involves only a couple of hundred investors, however, why can’t a price be set in the same book building manner – with an investment bank’s involvement – as an IPO? Those investors who want to exit can, and those who want to buy in can.
So how could this process work? A managing director at a global investment bank said there was “a lot of talk” around the concept of a private IPO. They explained LPs could be provided the option to sell down a minority stake to an identified buyer with a price set via a competitive auction. The buyer, who likely already knows the business and wants additional exposure, would be able to build their own exposure, perhaps on an economic-free basis.
One senior investment professional from a large asset manager with a secondaries business described a private IPO as a very large deal like a private recapitalisation that “blurs the lines between an IPO and a continuation fund” by bringing other investors beyond traditional secondaries buyers into a syndicate. They anticipate the first such transaction could happen this year.
“[It] feels only natural that that’s going to take place” at the large end of the market over the next five years or so, the person said. “GPs don’t want to necessarily relinquish control of their very best assets or sell them into the public market. They believe in these assets, and so finding a way of recycling investors is the answer.”
It is unclear how these would differ from tools already available in the market like private placements, for example.
EQT’s businesses, which are prepared for sales at an early stage in preparation for exit windows, will “probably” start testing out the concept of a private IPO, Sinding said.
“I’m not saying anything is imminent, but we are really trying to find a complementary path [to] other exits that are out there, and we think it’s going to be a win-win between our clients and us.”
For now, private IPOs remain a concept. However, like many innovations in private markets relating to liquidity in recent years, if the market can put the theoretical into practice, private equity could unlock yet another path to exit.
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