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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts
“Sun is shining, the weather is sweet,” sings Bob Marley. “Make you want to move your dancing feet.”
As stock markets bask in the sunshine of all-time highs, now seems like a great time for private equity firms to get moving to unload some of their $3tn global stockpile of assets. After all, investors are starved for initial public offerings after a two-year deal famine.
But recent flotations of private equity-owned companies paint a mixed picture, underscoring that fund managers are still being selective amid the market exuberance. In late January, KKR-backed BrightSpring Health Services priced its nearly $700mn Nasdaq IPO well below the range, only for the shares to tumble afterwards due to concerns over leverage and margins.
And then just before Easter came two more flotations from buyout firms. Perfume retailer Douglas, whose main shareholders are CVC and the Kreke family, raised €907mn on the Frankfurt Stock Exchange. Despite picture-perfect market conditions, the IPO priced at the low end of its target range, and the shares dropped 15 per cent in the first two days.
By contrast, EQT-backed Galderma, a skincare firm carved out of Nestlé in 2019, enjoyed a crackerjack debut on the SIX Swiss Exchange. Its SFr2.3bn IPO priced at the top of the range, and the shares jumped 21 per cent in its maiden trading session.
These offerings provide useful litmus tests as private equity wrestles with a back-breaking backlog of unsold assets. The pivotal question is whether the IPO market can unclog the blocked paths to exit so buyout firms can sell their companies and return cash to partners.
The Douglas and Galderma offerings had some things in common. Both companies carried substantial leverage, and both IPOs consisted almost entirely of new capital to reduce the debt load. But there the similarities end, and the differences reveal what matters for buyout firms trying to offload their holdings in the public markets.
Galderma had the appeal of a best-in-class blue-chip. It offered pure-play exposure to dermatology, boasted robust growth prospects, and came at a valuation that investors found compelling. A market cap of more than SFr12bn attracted investors keen on secondary market trading liquidity. Indeed, investors had been eagerly anticipating this flotation ever since Galderma raised $1bn of equity privately last June to reduce leverage.
The more revealing case study involves the listing of Douglas. CVC bought into the company nine years ago, meaning its tenure as owner has lasted longer than the standard three- to five-year private equity holding period. Few investors regarded a highly leveraged mid-cap European retailer such as Douglas as a must-own stock. The company has performed unevenly and flirted with financial distress, its bonds dipping below 80 cents on the euro in autumn 2022. A market cap below €3bn also put off some big fund managers as an investment in Douglas would be too small to move the needle on their portfolios.
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The large posse of financial advisers must have suspected that Douglas would be a hard sell. They had collected extensive fund manager feedback from months of pre-marketing. Research analysts at the syndicate banks had also published reports and met hundreds of investors before the IPO roadshow. So everyone had visibility on buyer interest. CVC and the Kreke family even injected €300mn, implicitly acknowledging that Douglas was otherwise too indebted to take public.
Pricing an IPO at the bottom of the advertised range often signals trouble, even if the valuation seems cheap. The lead banks — including Goldman Sachs, Citigroup and Deutsche Bank — tried everything to lift the price, announcing within hours of launch that the offering was oversubscribed. The next day, they talked up “anchor-sized” orders. But the tactics didn’t work, and the underwriters eventually settled for the low end of the range, giving investors a heavier allocation on their orders than some may have wanted.
Two lessons emerge from the recent IPOs. First, private equity firms must bring leverage down to levels palatable to public market investors before they can consider exiting via the stock exchange. Second, fund managers want the best stuff; a cheap valuation isn’t enough to lure them into buying an asset with so-so appeal. Investors are hunting for quality, not just a bargain.
The private equity backers of Douglas and Galderma haven’t sold out yet, but the listings provide a platform for them to dispose of their stakes over time. Future business performance will determine whether these listing victories turn out to be epic or pyrrhic.
