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Rula Khalaf, editor of the Financial Times, selects her favorite stories in this weekly newsletter.
The writer is the former global head of capital markets at Bank of America, and is now a managing director at Seda Experts
“The sun is shining, the weather is beautiful,” sings Bob Marley. “Makes you want to move your dancing feet.”
With stock markets enjoying all-time highs, now seems like a good time for private equity firms to move to unload some of their $3 trillion global stock of assets. After all, investors are hungry for IPOs after a two-year deal famine.
But recent flotations by private equity-owned companies paint a mixed picture, underscoring that fund managers remain selective amid market exuberance. In late January, KKR-backed Bright Spring Health Services priced its roughly $700 million Nasdaq IPO well below range, but shares then fell on concerns about leverage and margins.
Then, just before Easter, two more offers came from buyout firms. Fragrance retailer Douglas, whose main shareholders are CVC and the Crick family, raised €907 million on the Frankfurt Stock Exchange. Despite ideal market conditions, the IPO was priced at the lower end of its target range, and shares fell 15 percent in the first two days.
By contrast, EQT-backed Galderma, a skincare company spun off from Nestlé in 2019, enjoyed a debut on the Swiss SIX exchange. The CHF2.3 billion IPO was priced at the top of the range, and shares jumped 21 percent in the first trading session.
These offerings provide useful checks at a time when private equity grapples with a backlog of unsold assets. The pivotal question is whether the IPO market is able to open the blocked exit paths so that buyout firms can sell their companies and return cash to partners.
Douglas and Galderma's shows had some things in common. Both companies were highly leveraged, and their IPOs consisted almost entirely of new capital to reduce their debt load. But that's where the similarities end, and the differences reveal what matters to buyout firms trying to offload their holdings into public markets.
Galderma has the appeal of large, best-in-class companies. It offered a pure dermatology offering, boasted strong growth prospects, and came up with a valuation that investors found compelling. The market capitalization of more than 12 billion Swiss francs has attracted investors keen on the liquidity of trading on the secondary market. In fact, investors have been eagerly anticipating this flotation since Galderma raised $1 billion in private equity last June to reduce leverage.
The most revealing case study involves the inclusion of Douglas's name. CVC bought the company nine years ago, meaning its tenure as owner has lasted longer than the standard private equity holding period of three to five years. Few investors viewed a highly leveraged mid-cap European retailer like Douglas as a must-own stock. The company has had uneven performance and is in financial distress, with its bonds falling below 80 cents on the euro in the fall of 2022. A market capitalization of less than 3 billion euros is also holding back some big fund managers because an investment in Douglas would be too small to get things moving. on their investment portfolios.
The large group of financial advisers must have suspected that Douglas would be a tough sell. They gathered extensive feedback from fund managers from the pre-marketing months. Research analysts at the pooled banks also published reports and met with hundreds of investors ahead of the IPO roadshow. So everyone had a vision of buyer interest. CVC and the Criqui family even pumped in €300 million, in tacit admission that Douglas was too indebted to go public.
Pricing an IPO at the bottom of the announced range often indicates a problem, even if the valuation looks cheap. Leading banks – including Goldman Sachs, Citigroup and Deutsche Bank – tried their best to raise the price, announcing within hours of its launch that the offer was oversubscribed. The next day, they talked about “anchor-sized” orders. But the tactics didn't work, and the underwriters eventually settled on the lower end of the range, giving investors more allocation to their orders than some might want.
There are two lessons to be learned from recent IPOs. First, private equity firms must reduce leverage to levels acceptable to public market investors before they can consider an exit through the stock exchange. Second, fund managers want the best stuff; A cheap valuation is not enough to tempt them to buy an asset with average attractiveness. Investors are looking for quality, not just a deal.
The private equity backing Douglas and Galderma has not yet been sold, but the listing provides a platform for them to divest their stakes over time. Future business performance will determine whether these listing wins are epic or pyrrhic.
