Next year is slated to be a big one for European IPOs and ECM, with financial sponsors expected to lean further on equity markets to demonstrate their exit skills.

The product suite may prove a key weapon in an ever-more competitive battle among GPs to stave off the growing threat of private equity zombification.

Private equity performance analysis has further shifted over the past year, with sources noting that PE’s LP backers are leaning far more heavily on the distributed to paid-in capital (DPI) metric over internal rate of return (IRR).

This isn’t new. But it is becoming more important as several LPs are reported to be reevaluating their portfolio with regard to their private market investments due to a lack of returns.

At the same time, many GPs are expected to hit the fundraising market next year to raise new large-cap strategy funds.

“I think for a lot of large cap sponsors, they won’t say it, but they’ll be thrilled to get to the same number as the last fundraise,” said a secondaries banker. “So, I’m not expecting significantly bigger large-cap funds from where we were in the last round.”

This debate is raging at a time when some are starting to question the future of private equity and whether the PE universe is due for a conflagration that transforms it.

If funds cannot attract new capital, then some will be led to just manage existing investments over longer durations, perhaps through various continuation vehicles.

The rise of “zombie” funds, where sponsors raise no new capital, but just manage legacy investments, is therefore becoming an increasingly hot topic.

“There will be more zombie funds,” noted a private markets advisor. “GP X can’t raise a new fund because of a combination of middling performance, plus fundraising is harder, and management fees are running off, so the GP may or may not get carry; the economics are looking bad, they’re basically stuck.”

The trend was also highlighted recently by EQT’s new chief executive, Per Franzén, in an interview with the Financial Times in which he noted that 80% of private capital businesses could become zombie firms within the next decade.

ECM a weapon to fight zombification

Several market participants speaking to ECM Pulse this week noted that the gulf between managers favoured by LPs and those that will struggle to raise new capital is only growing wider – and those that will be in investors’ good books next year will be those that can show LPs they can exit big assets, particularly those acquired in the heady days of the Covid-19 pandemic over 2020-2021.

This is where the IPO market and equity follow-ons come in.

“We expect several of the big-name sponsors to be out there raising large-cap funds next year, and those that do need to show that they are returning that capital to investors,” said a financial sponsor coverage banker. “The exit focus is going to be on that 2020/2021 vintage next year, especially for those that need to raise capital.

“IPOs are very big part of that now.”

Many large-cap sponsor assets remain too large to sell easily, so an IPO becomes the most obvious route for sponsor monetization.

Several large-cap sponsor-backed listings are being primed for 2026, including prospective London IPOs of both HG Capital-backed Visma and EQT-backed IVC Evidensia. Both are pencilled in for the second half of next year.

There is also a possibility of a German listing for Mobile.DE, from Blackstone and Permira, although there is a highly competitive M&A track running concurrently with the listing, which the sponsors are believed to favour.

EQT’s likely presence in next year’s IPO market continues a run of increased ECM activity for the sponsor, which has listed five portfolio companies since the start of 2023 – two in the US and three in Europe, according to Dealogic data.

It has also been heavily involved in selling down listed exposures in the past three years and is by far the most active private equity user of equity capital markets in Europe.

Several dealmakers and investors have repeatedly noted to ECM Pulse that EQT has one of the most stellar reputations of any private equity company in Europe, and much of that is to do with its efficiency in executing realizations via public markets.

Its disposals of Swiss skincare business Galderma have been particularly heralded as an exercise in pragmatism given EQT has been happy to leave money on the table when it listed the company in March 2024 and through a whole series of secondary sell-downs afterwards.

Over six block trades since September 2024, EQT and its Galderma co-investors have sold stock worth over USD 12bn; they acquired the business at an enterprise value of USD 10.2bn in 2019.

The last deal in October this year, for USD 3.3bn equivalent, was priced at CHF 130 a share at a USD 41.9bn market value according to Dealogic. Galderma is up a further 2.46% this afternoon (8 December) after the EQT-led Sunshine SwissCo consortium sold a 10% stake in the business to Paris-listed cosmetics giant L’Oréal.

“Some of EQT’s competitors may say they have sold things at too low a price, but look at what has been achieved with Galderma – it’s truly extraordinary,” said an investor.

Source: Dealogic

Other PE firms have embraced the strategy, like Hellman & Friedman through its IPO of Verisure in October; H&F priced the deal generously, leading to one of the best opens for a large IPO in Europe in 2025.

The stock has continued to trade above the IPO price since.

To CV or not CV

If private equity companies decide they have an asset too large to sell and don’t want to embrace the pragmatism required to price a successful IPO, then another option open to them is to explore a continuation vehicle.

CVs might still have a mixed reputation – but while they are not always abhorred by LPs, investors largely want them to be used sparingly.

They should be for real trophy assets where a GP has legitimate cause for a longer investment period, as was the case with ice cream business Froneri, recently rolled into a continuation vehicle by PAI Partners, noted the coverage banker.

“There are others that use it far more, and it really tests the patience of LPs, doing more CVs and in some case CV-squared vehicles,” he added. “In many cases, the impression among LPs is these are for assets that the sponsors just couldn’t sell.”

EQT, for example, has never used a CV, although there were stories that it had considered one for Waystar, the healthcare revenue management business it eventually listed in June 2024.

When there is a genuine case for growth, a CV can be justified – but when an asset is mature and very large already, the argument for holding the investment for longer begins to wane.

“The reason why some large-cap GPs won’t do a CV is because there just isn’t a good enough rationale; for a mid-market asset, you’re able to create more value and growth, but for a large asset, realistically, how much bigger can you grow it in five years’ time to justify a CV?” asked the secondaries banker.

Large-cap sponsors need a plan for exiting assets and growing DPI if they are to come cap-in-hand to LPs again this year. While silver bullets are often most associated with werewolves, an IPO might just be the equivalent to fight off PE zombification.

The question is how many sponsors are willing to bite that bullet.