In a difficult IPO market, a niche exit process, termed Private IPOs, has been gaining traction as an alternative liquidity route for issuers and could rapidly grow as a runway to an eventual public exit.

The process has been gaining popularity as sponsors increasingly consider partial monetisation options, such as continuation funds, in the face of a challenging exit environment, market participants said, citing valuation challenges and a sluggish IPO market.

Luke Finch, head of client services at Hg said, during a panel at the BVCA Summit in London on 12 September, that a “private IPO probably isn’t the right name, it is more like a series of matched, large, block trades or mini-M&A processes for minorities where you match buyers and sellers.”

“There is a complexity to it, as in, there can be sovereign wealth funds, public market cross-over investors and having to manage an increasingly large shareholder group as well, as potentially a larger board,” he said.

Vivio Berardi, capital markets director at Oakley Capital, explained that a private IPO is where a company has three or four (or more) private investors taking a sizeable stake, concurrently with management, or a PE shareholder, staying committed to the business.

“We still see it as an M&A transaction, but you could be dealing with different buyers than a traditional minority transaction, some people call it passive equity syndication or even private placement,” he said.

The structure differs from a pre-IPO placement, which would typically involve bringing in one or two public market investors a year or so before an IPO, whereas recent private IPO examples, cited by panellists include Visma, SpaceX, IQHQ and the Hub International, all many years from a public listing.

These deals typically involved significant broadening of the shareholder base several years before a potential IPO, with either a private equity investor maintaining a controlling interest, or management keeping a large controlling stake. Another feature of a private IPO is the opportunity to provide liquidity to the company on a recurring basis.

Not for everyone

The concept of “private IPOs” is still evolving.

There has been an increase in minority recapitalizations of large sponsor-held businesses, with capital coming from asset managers like Blackstone, KKR, Blackrock, Leonard Green, and Bain Capital.

Many private equity funds, along with tactical opportunities funds, deploy minority capital into non-control liquidity solutions in private companies.

Private IPOs also tend to differ from traditional IPOs in that they are not broadly syndicated, noted Brian Friedman, managing director for private capital markets at William Blair. In public markets, IPOs often bring in 30-50 new shareholders, whereas private markets are more concentrated, with one to three investors typically involved.

This is due to governance provisions that give lead investors control over material business transactions, such as M&A activity or timing of an IPO. The lead investor often represents the entire class of stock, making it less practical for multiple investors to participate in the same round, he added.

Berardi added that though this is a new capital solution it would not be the right route for every company, with some businesses more suited to a straight sale or continuation vehicle. In addition, as a new concept in capital markets, it will require investor education.

Kim Furling, CEO of CVCA pointed out that in Canada this type of transaction is known as a club control deal. “Everyone is thinking about liquidity, fundraising. It has been about re-ups at a GP level. We have also seen a rise of secondary vehicles, this is another dynamic route to liquidity,” she said.

However, with every route to liquidity there are new challenges, the panellists noted. Within a private IPO, there is an influx of equity investors, with new investment horizons and expectations, who are keen to understand management’s vision, they said.

“A private IPO can’t happen on its own, it needs the founders or a few committed shareholders in there, and there needs to be the path to growth,” Finch said.

“Depending on the company, GP strategy and market conditions, a private IPO might not be necessarily an end state, you need to be able to see a path to the public market,” Berardi said.

He added on the sidelines of the conference that a private IPO structure could be a “middle step” between a continuation fund and a full IPO.

“Given existing IPO markets and recent IPO performances, many companies don’t want to go to the public markets too soon, and face additional pressure and scrutiny of the market, which may cause them to focus more on short-term results rather than long-term growth,” he added.

Berardi added that private IPO candidates had to be sizeable as well as being mature enough to be ready for a listing and to go straight into one of the larger indices.

Stock liquidity is also a factor than could impact share price performance after IPO, he added.

He pointed out that this deal structure would not replace pre-listing securities, such as a pre-IPO convertible bond, as the private IPO provides a different degree of flexibility and does not have the same protections.

At the end of last year, Visma brought in 20 new investors, including Altaroc, Jane Street and NYC Retirement System raising USD 1bn, as well as another USD 3bn from existing investors including its majority (70.2%) owner HG Capital. The transaction valued Visma at USD 19bn.

The panellists pointed out that, even though a company that has taken this route does not face the rigour of public markets reporting requirements, it will face different pressures given it has a broader capital table.

Finch pointed out that developing a public market mindset can be helpful for these companies. Visma, for example, was previously a public company and always maintained the discipline of quarterly public reporting, he said.

“Widening your communications with shareholders can help a company develop a public market mindset,” Finch said.

Growing in relevance

Panellists explained that private IPOs are becoming more and more relevant as a new capital solution. Private IPOs in the US tend to be easier than continuation vehicles and are more flexible, they said.

Private IPOs offer companies the opportunity to stay private longer while waiting for more stable market conditions and improved public market valuations, William Blair’s Friedman argued.

This allows them to clean up their balance sheets, make strategic acquisitions, and better prepare them to go public. Minority recapitalisations have also increased in size, with some deals now exceeding USD 500m, a significant jump from the USD 100m-200m range seen in previous years.

As the IPO market continues to improve, Friedman expects activity to gain momentum in 2025. By then, many investors who poured capital into private markets, between 2019 and 2021, will be nearing the end of their hold periods and seeking liquidity solutions. Public markets will continue to offer a large pool of capital for these exits.

“Additionally, we anticipate a more active crossover market compared to the past few years, with growth industries likely to attract more capital than value industries,” he said.

Berardi noted that a continuation vehicle can crystalise, and compound, GP economics and allow for reinvestment in the growth of a company which then lets GPs hold onto winners in the portfolio for longer.

In contrast, a private IPO gives a potential route to public markets down the line (or to a full sale in the private markets) without the risk of being punished in trading, he said.

But it also brings governance issues and potentially can prove a drag on management time, he added.

Naturally, there are some benefits to immediately trading on the public markets, particularly the price discovery mechanism, the panellists noted. Liquidity is the number one thing you are giving up in a private IPO, they said. There is a human element to any deal, if an IPO is a route to an exit, then there are rules of engagement with the investor base, they said.

Hybrid systems, including the Private Intermittent Securities and Capital Exchange System (PISCES) in UK, NASDAQ private markets, Forge, have emerged to help investors trade in the private markets.

The panellists noted the possibilities for these hybrid platforms to unify with traditional exchanges which could help to drive liquidity.

However, as private IPOs grow in prominence there is a question over whether regulators will begin casting an eye over the market, the panellists said.

Finch pointed out that there is the potential for more transactions using this structure. “There are a number of businesses in the USD 3bn, USD 4bn or USD 5bn EV size range where we would love to keep the company private for a six-to-eight-year timeframe to get the business more scaled up for the public market, ready for a scale up,” he said.

“The public markets are quite an unforgiving place for businesses that aren’t large enough to get the right level of investor attention, and the private equity industry has lots of scars on its back from having listed companies that were not big enough and not quite ready,” he said.  “It is a great way to prepare for potential future life in the public market.”