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Roula Khalaf, editor of the FT, picks her favorite stories in this weekly newsletter.
The author is a former global head of equity capital markets at Bank of America and now managing director at Seda Experts
“The sun is shining, the weather is sweet,” sings Bob Marley. “Make you want to move your dancing feet.”
With stock markets enjoying all-time sunshine, now appears to be a good time for private equity firms to offload some of their $3 trillion in global assets. After all, investors are hungry for IPOs after a two-year deal famine.
But recent IPOs by private equity firms paint a mixed picture and underscore that fund managers are still being selective amid market exuberance. In late January, KKR-backed BrightSpring Health Services priced its nearly $700 million Nasdaq IPO well below that range, only to have its shares plunge afterward on concerns about leverage and margins to be recorded.
And then two more IPOs by buyout companies followed shortly before Easter. The perfume retailer Douglas, whose main shareholders are CVC and the Kreke family, has raised 907 million euros on the Frankfurt Stock Exchange. Despite perfect market conditions, the IPO was priced at the low end of its target range and shares fell 15 percent in the first two days.
In contrast, EQT-backed Galderma, a skin care company that emerged from Nestlé in 2019, celebrated a brilliant debut on the SIX Swiss Exchange. The IPO was priced at the high end at 2.3 billion francs, and shares rose 21 percent in the first trading session.
These offerings provide useful litmus tests as private equity grapples with a massive backlog of unsold assets. The key question is whether the IPO market can clear the blocked exit paths so that buyout firms can sell their companies and return cash to their partners.
Douglas and Galderma's offerings had some similarities. Both companies had significant debt, and both IPOs consisted almost entirely of new capital to reduce debt burdens. But that's where the similarities end, and the differences highlight what matters for buyout firms trying to offload their holdings in the public markets.
Galderma had the appeal of a blue-chip, blue-chip company. It offered pure exposure to dermatology, had robust growth prospects, and was valued at a valuation that investors found compelling. A market capitalization of more than 12 billion francs attracted investors interested in the trading liquidity of the secondary market. In fact, investors had been eagerly awaiting this IPO since Galderma privately raised $1 billion in equity to reduce debt last June.
The more revealing case study concerns Douglas' listing. CVC bought into the company nine years ago, meaning its tenure as owner has lasted longer than the typical three-to-five-year holding period of private equity firms. Few investors considered a heavily leveraged European mid-cap retailer like Douglas a must-own stock. The company performed unevenly and struggled with financial difficulties, causing its bonds to fall below 80 cents per euro in fall 2022. A market capitalization of less than 3 billion euros also deterred some large fund managers, as an investment in Douglas would be too small to move the price on their portfolios.
The large crowd of financial advisors must have sensed that Douglas would be a hard sell. They had collected extensive feedback from fund managers during months of pre-marketing. Research analysts from the syndicate banks had also published reports and met hundreds of investors before the IPO roadshow. This meant everyone had insight into buyer interest. CVC and the Kreke family even invested 300 million euros, implicitly admitting that Douglas was otherwise too indebted to go public.
Pricing an IPO at the low end of the advertised range often indicates problems, even if the valuation appears cheap. The leading banks – including Goldman Sachs, Citigroup and Deutsche Bank – tried everything to raise the price and announced within hours of the launch that the offer was oversubscribed. The next day they talked about “anchor large” orders. But the tactic didn't work, and underwriters ended up choosing the lower end of the range, giving investors a higher allocation of their orders than some might have wanted.
Two lessons can be learned from recent IPOs. First, private equity firms must reduce leverage to a level acceptable to public market investors before they can consider an exit via the stock market. Secondly, fund managers want the best; A cheap valuation is not enough to entice them to buy an asset with mediocre appeal. Investors are looking for quality, not just bargains.
Douglas and Galderma's private equity backers haven't sold out yet, but the listings give them a platform to sell their stakes over time. Future business performance will determine whether these listing victories prove epic or pyrrhic.
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