Investment funds are generally human-sized structures with small teams. However, alongside a majority of small players, there are some private equity behemoths. Among them, some European players have even gone public, following the example of American giants like Blackrock, Blackstone, KKR, The Carlyle Group and Apollo Global Management. Recent examples include BridgePoint (listed on the London Stock Exchange in July 2021), Antin Infrastructure (listed on Euronext in September 2021) and Audacia (listed on Euronext Growth in October 2021). Given this recent trend of IPOs, it’s worth examining the changes that an IPO implies for private equity funds. What benefits do management companies gain from financial markets? What risks and constraints do they face?
I. Simplified fundraising and controlled liquidity through stock market listing
A. A sustainable and diversified source of financing
Private Equity funds go through four major phases: (i) fundraising, (ii) investing in companies, (iii) investment monitoring, and (iv) exiting by selling to realize capital gains. Fundraising is crucial because it initiates the entire process.
Financial markets offer an opportunity to maximize fundraising and move away from the traditional, lengthy fundraising process that involves approaching institutional investors or wealthy individuals. This enables funds to reach a wider audience, particularly small investors who have not yet explored private equity investments.
IPOs of private equity funds open up new possibilities for individuals who are attracted by the returns offered by this asset class. These IPOs reduce the entry threshold considerably, typically between €100,000 and €1,000,000. The EQT Partners IPO in 2019 was successful due to the enthusiasm of small investors. The share price rose by 30% on the first day of listing, and the offer was more than 10 times oversubscribed.
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B. Increased Flexibility in Fund Development Cycles
Non-listed management companies typically hold their investments for 5 to 7 years, allowing investors to exercise their liquidity options and receive associated capital gains at the end of this period. Listing on the stock exchange frees private equity players from this liquidity imperative. Rather than selling a company’s shares to provide liquidity to subscribers, the management company can hold onto its shares for a longer period of time. This approach avoids hasty exits and allows the company to sell its shares at the most opportune time.
C. Market-Raised Funds Enable PE players to Launch New Funds and Projects
After an IPO, a Private Equity fund has liquidity to create new investment vehicles and launch new projects. For example, Audacia raised €7.4 billion during its IPO on Euronext Growth in October 2021, which it will use to develop innovative investment vehicles in promising sectors such as the space industry (launch of the Geodesic fund), next-generation nuclear power, and food bio-transition.
Similarly, Tikehau Capital completed its IPO in 2017 and achieved a market capitalization of €1.5 billion. This operation allowed the management company to launch new private debt and real estate investment vehicles. In December 2018, Tikehau Capital acquired ACE Management, an investment structure specializing in aerospace and defense.
D. IPOs offer historical shareholders an opportunity to exercise their liquidity
IPOs can provide fund partners with a chance to sell some of their shares and realize capital gains. For instance, during the BridgePoint IPO, the 166 shareholders who were employees of the company were able to sell a portion of their shares for £380 million.
II. The IPO brings substantial changes
Going public through an IPO is a significant event for a private equity fund. The management company and its operations receive more attention and scrutiny. Financial communication obligations must be met, and market pressure can result in share price fluctuations. Nonetheless, going public can also bring increased visibility and credibility to the fund.
A. Financial communication and reporting obligations
As with any company that goes public, listed investment funds must follow the transparency and financial communication regulations imposed by the market. For management companies, which are accustomed to limiting their financial communications, establishing regular reporting, publishing accounts, and responding to journalists’ requests can be time-consuming and complex.
Investment funds are thus required to adopt a financial transparency policy that contrasts with the very confidential environment of private equity.
For example, an IPO exposes employee compensation. The fixed and variable salaries of employees, especially board members, must be disclosed in annual reports. Financial communication can sometimes lead to a freeze or reduction in partners’ remuneration to achieve salaries that the market tolerates. If a management company’s performance declines, it becomes even more challenging to maintain high levels of compensation.
B. A costly transition
PE funds cannot avoid the cost of an IPO, which can range between 5% to 10% of the total amount raised. As an illustration, Blackstone’s IPO led to a total expense of $802.6 million over one quarter. Despite this significant initial expense, it can be offset in the long run in the event of additional capital raises.
As for any company accessing the financial markets, PE funds cannot escape the cost of an IPO, generally between 5 and 10% of the total amount raised. As an example, Blackstone’s IPO will have resulted in a total charge of 802.6 million dollars over one quarter. However, this large initial commitment can be offset in the long run in the event of additional capital raises.
Although an IPO for Private Equity funds can offer several benefits and relieve liquidity constraints, it also presents new challenges. The expenses of the IPO, the reporting obligations, and the inherent risks of the equity market may deter some players from pursuing this lengthy and intricate process with multiple ramifications.
It is also worth noting that some funds may not consider an IPO due to their unique characteristics or development strategy. This is particularly relevant for funds backed by significant financial players such as banks or large companies, governments, deposit funds, or insurance companies. An IPO does not seem necessary either when the fund’s shareholders are satisfied with the pace of growth and the amount raised or when they wish to keep their shares in the fund without risking upsetting the company’s operations.
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