After several slow years, private equity sponsors have been edging back into the IPO market, with deal volume year to date more than doubling as opposed to a year earlier, according to Dealogic data.

Throughout the year, firms have been testing the market one deal at a time and using each listing to refine their views on the art of the possible. Uneven aftermarket performance, with IPO investors becoming more selective, means sponsors are prepared to push listings further out rather than sacrifice value.

Dealogic recorded 23 North American sponsor-backed IPOs worth USD 21.5bn through 29 September, versus 14 worth USD 8.2bn a year earlier.

The outcomes varied; the strongest results came from businesses exposed to aerospace, defense and power infrastructure. Arcline-backed Arxis gained 38% on its first day, while J.F. Lehman-backed Doncasters rose 33% after upsizing its IPO and pricing above the marketed range. As of 7 October, they remained around 68% and 24% above their respective offer prices. Neos Partners-backed Forgent Power also fared well, with the electrical equipment manufacturer priced at USD 27 and rising more than 8% on its first day. Its shares were around 51% above issue by 7 October, allowing Neos Partners and other existing shareholders to sell shares through follow-on offerings in March, May and July.

But successful IPOs from the previous months, including Madison Air, INNIO and X-Energy, now trade below issue.

Through peaks and troughs, listings have been coming to market steadily. Especially for sponsor-held companies, expectations around IPO pricing and valuation are now better calibrated, Cleary Gottlieb partner Lesley Janzen said. A couple of years ago, she worked on IPOs where sponsors’ expectations were not in line with the market, preventing them from moving forward. “Right-sizing that expectation is allowing sponsors to go to market and to get that post-IPO share price appreciation, which is important for future sell-downs,” she said.

Sponsors have increasingly been using dual-track processes and new deal structures to test the valuations available in public markets and help manage volatility. But IPOs remain a real option, not simply a stalking horse, she added.

Not all investors are embracing sponsor-backed offerings. Sponsor-backed IPOs “have always been a challenge,” said one portfolio manager. Even when sponsors say they understand that an IPO is not the end of the road and that further follow-ons will come, they press for the highest possible valuation on the debut. They “absolutely squeeze on valuation,” he said. As a result, he expects conditions to remain challenging for many sponsor-backed companies.

Evan Riley, head of US ECM Americas at BNP Paribas, attributed the pick-up in activity until more recently to a narrowing bid-ask spread on valuation between issuers and public investors. In addition, he noted, as private equity firms raise larger funds and acquire larger assets, the universe of potential buyers, whether other sponsors or strategic acquirers, becomes smaller. That makes an IPO more likely to become the primary exit path, he said.

The stock market’s long run coupled with the rise in interest rates have begun to weigh on sponsor sentiment in recent weeks, causing IPOs to be delayed or postponed, said Ilir Mujalovic, head of Cleary Gottlieb’s equity capital markets practice.

CVC-backed Bamboo Insurance postponed its September IPO amid valuation pressure. Among recent public filers, KKR-backed Wella and TDR and I Squared-backed Aggreko, while Copeland remains a possible year-end candidate. Mavis Tire is now more likely to list in 2027 after acquiring Pep Boys, while Cumberland Farms could reportedly also be pushed into next year.

Despite those risks, issuers still feel optimistic and are moving forward with preparations for an eventual IPO, Mujalovic said.

“There’s a lot of backlog in private equity; they haven’t been able to monetize, so they’re pushing to test the market,” Mujalovic said. “I think it’s being done in a responsible way, which is good.”

Sponsors are sophisticated users of the capital markets and highly attuned to value, BNP’s Riley said. Unless they need to raise capital for a particular reason, their willingness to wait another quarter or two is high. Several issuers that had considered September or the October-November period have already moved their attention further out, he noted.

Timing matters

There have been a few pulled offerings, but preparations continue.

Sponsors are running bank selection processes, preparing management teams, and working with them to get “public ready” for future listings, said Nick Williams, head of Americas ECM at Deutsche Bank.

Sponsors remain cautious, particularly those with several assets that may eventually need to go public. “You don’t want one underperforming transaction to undermine your credibility when bringing future assets to market,” Wlliams said. They still assume the market will be open after what may prove to be a few bumps in the road lasting a month or so, Williams said. That expectation is keeping preparation for 2027 alive and well. “You cannot sell everything to a strategic. You cannot put everything into continuation vehicles and you cannot sell minority stakes in everything. Some of it has to come to the public market,” Williams added.

September was “incredibly busy from a pitching perspective. It was nonstop,” said Stephane Gruffat, global head of ECM syndicate at Deutsche Bank.

Which companies can come next remains unclear. Many traditional private equity holdings are stable businesses with good cash flow and margins, but are not necessarily high growth. Viable candidates need enough growth, cash generation or scope for margin improvement, and must have deleveraged enough that the IPO does not require an excessively large primary issuance. A significant number of candidates may remain out of reach until late 2027 or beyond simply because they need more time to delever, Williams said.

For some sponsor-owned assets, 5.25%-5.5% on the US 10-year Treasury means leverage and debt maturity walls are a real topic, as there has been some adjustment to what constitutes optimal leverage and capital structures.

Gauging the effect of AI 

Sponsors are also examining the impact of AI on IPO prospects, said Mike Bellin, US IPO services leader at PwC. They are asking whether AI could erode margins or customer relationships, how deep a company’s moat is and whether the technology could accelerate front-office sales or make the back office more efficient.

Readiness is another part of that assessment. Sponsors want to know whether the culture and infrastructure are in place to institute change and create value from AI, Bellin said.

Those questions are particularly important for software businesses. Longstanding IPO candidates including Thoma Bravo-backed Proofpoint, Hellman & Friedman-backed Genesys and UKG are all well-positioned and profitable companies but have clearly lower growth than OpenAI, Anthropic or SpaceX, said one technology sector banker. Investors therefore need to determine a credible valuation metric and assess potential AI headwinds.

Before listing, those companies “really, really need to figure out their model” and explain how they will respond to AI or use it as an opportunity, the banker said. They are unlikely 2026 candidates and more probable for 2027. Their owners still need liquidity, so they are likely to test the market once those questions have been answered.

Portfolio reviews extend beyond AI. Sponsors with large and complex holdings are considering whether individual segments could be carved out, sold, spun off or listed separately, Bellin said.

Sponsors have more exit routes, but IPOs are still high on the list.

“Private equity, their business is getting their companies to monetize, so certainly they’ll do it if they can,” one ECM lawyer noted. “But it’s all going to be subject to the market.”