Private equity resorts to buying back companies after IPO flops

Private equity firms are resorting to buying back companies they only recently took public, in a bid to salvage investments that have struggled to perform on stock exchanges. 

Firms including EQT, Cinven and Silver Lake have in the past few months either taken private or considered buying back public companies they owned or in which they held a large minority stake.

The tactic underscores the difficulties that buyout groups have had exiting their portfolio companies via the public markets, historically an important way of monetising their largest assets. In 2021, with public markets trading at record highs, buyout houses floated a record 287 companies worth just shy of $140bn, according to Dealogic data.

“IPOs sometimes bring their own challenges. There are those examples where the public markets haven’t taken to companies in the way the sponsor would have liked, there has been volatility in the share price or there hasn’t been liquidity for sponsors to sell out,” said Alastair Brown, a partner at the law firm Freshfields Bruckhaus Deringer, who works with private equity groups.  

Shares in many companies taken public by private equity firms in 2021 have fallen well below the price at which they initially floated, presenting a chance for the firms to buy them back cheaply, industry executives said. 

In August, Swedish private equity giant EQT offered to take private German software group Suse in a deal worth about €3bn after a tech sell-off and profit warning dented the shares, about half the valuation at which EQT listed a 24 per cent stake in April 2021.

In September, UK private equity house Cinven struck a deal to buy back the outstanding shares in Synlab, a laboratory and medical diagnostic services company in which it retained a 40 per cent stake, after a disappointing run of performance and a profit warning.

And Silver Lake said last month that it was considering taking entertainment group Endeavor private again after the company and its chief executive Ari Emanuel became frustrated with lacklustre share price performance. The US private equity group controls just over 70 per cent of Endeavour’s voting rights.

“We’ve only seen the beginning, clearly there will be more,” the head of equity capital markets at one large European private equity firm said.

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. 

Last month, General Atlantic agreed to roll most of its 52 per cent stake in software group EngageSmart into a $4bn buyout led by Vista Equity Partners, two years after General Atlantic listed it on the public markets.

Vista used a similar manoeuvre in its $4.6bn sale of events planning software company Cvent to Blackstone in March. Vista, which retained an 81 per cent stake in Cvent after floating it in 2021, agreed to roll $1.25bn into the buyout through a preferred equity investment to boost the sale price.

Private equity firms still own large stakes in dozens of former portfolio companies whose shares are languishing on the public markets.

These include boots brand Dr Martens, whose shares are down almost 70 per cent since Permira listed it in January 2021; chemicals firm Azelis, which has shed 25 per cent of its value since EQT brought it to market in October 2021; and cyber security company Exclusive Networks, which has dropped 10 per cent.

Private equity houses that do take companies back into private ownership can try to build the businesses or carve them up to increase their value. “The private markets can be a flexible place to do that because they don’t come with the scrutiny of regular reporting to public market investors,” said Christopher Sullivan, UK head of private equity for the law firm Clifford Chance.

But such deals to de-list companies from the public markets are not always popular with investors in private equity funds or with public equities fund managers who want to back a company but cannot participate in the private vehicle. “The market typically hates them,” one adviser to private equity firms said.

Part of the problem is that one failed public listing means getting out of the business might be even more difficult later on, putting pressure on the investment firm to transform the company. 

“In order to relist, there need to be fundamental changes to the company,” one buyout executive said.