In an effort to salvage investments which have failed to perform well on the stock exchanges, private equity firms buy back companies that they recently brought public.
In the last few months, firms such as EQT Cinven and Silver Lake either took private or looked at buying back publicly traded companies in which they had a significant minority stake or owned.
This tactic highlights the difficulty that buyout firms have faced in exiting their portfolios via public markets. Historically, this was an important method of monetising the largest assets. According to Dealogic, in 2021, when public markets were trading at record levels, buyout groups floated 287 companies, worth a total of just under $140bn.
” Initial Public Offerings can present their own set of challenges. “There are some examples where public markets haven’t reacted to companies the way sponsors would have liked. There has been volatility in share prices or there hasn’t had been enough liquidity for sponsors to be able to sell out,” Alastair, a partner with Freshfields Bruckhaus Deringer who works with Private Equity Groups, said.
Industry executives say that shares in many companies floated by private equity firms have dropped well below their initial price, giving them the opportunity to buy the shares back at a discount.
After a tech crash and profit warning, EQT, a Swedish private equity firm, offered in August to buy the private German software company Suse for about €3bn. This was about half of the value at which EQT had listed a 24% stake in April 2021.
After a poor performance and profit warning, UK private equity firm Cinven bought back all outstanding shares of Synlab. Synlab is a laboratory and diagnostic services company.
Silver Lake announced last month it would consider taking the entertainment group Endeavor back private after its CEO Ari Emanuel and the company became frustrated by a lacklustre performance of Endeavor’s share price. Just over 70% of Endeavour’s votes are controlled by the US private equity group.
The head of equity capital market at a large European private equity company said, “We have only seen the start. There will be more.” Some private equity groups have also participated in take-private offers for portfolio companies led by rivals in an effort to facilitate the deals and boost share prices.
General Atlantic announced last month that it would sell the majority of its 52 percent stake in software company EngageSmart to Vista Equity Partners for $4bn, just two years after General Atlantic had listed the group on public markets.
Vista made a similar move in March when it sold Cvent, a software company for event planning, to Blackstone for $4.6bn. Vista, which held an 81 percent stake in Cvent following its flotation in 2021 and agreed to invest $1.25bn in the buyout via a preferred equity investment in order to increase the sale price.
Private equity firms own substantial stakes in former portfolio companies, whose shares have been languishing for years on the stock market.
This includes boots brand Dr Martens whose shares have fallen by almost 70% since Permira listed them in January 2021, chemicals company Azelis which has lost 25% of its value since EQT introduced it to the market in October 20,21, and cyber security firm Exclusive Networks which has declined by 10%.
Private equity firms that take over companies can either build them or sever them to increase the value. Christopher Sullivan of Clifford Chance, UK’s head of private equity, said that the private markets could be a good place to do this because there is no regular reporting required to investors on the public market. One private equity adviser said that the market hates these deals.
One of the problems is that if a company fails to list on a public exchange, it may be more difficult for them to exit the business later. This puts pressure on the investment firms to transform the firm.
One buyout executive stated that “in order to relist the company, there must be fundamental changes made to the business.”