‘Follow-on’ share offerings have rebounded even as prices have languished below IPO heights
Private equity groups are increasingly selling shares in portfolio companies at a discount to the price at which they went public, in a sign they do not expect stock market valuations to regain their previous highs soon.
So-called follow-on offerings of shares in previously listed companies are a key way for private equity groups to monetise their investments and return cash to investors. Sponsors traditionally sell a fraction of their portfolio company in an initial public offering, then try to sell down the rest of the stake at increasingly high prices over the following years.
Follow-ons were badly hit by last year’s stock market declines, with sales by private equity-backed companies dropping more than 70 per cent, according to Dealogic data, as investors hoped to ride out the downturn.
However, sales have started to rebound despite the fact that valuations for the most recently listed companies are still languishing well below their peaks.
Private equity-backed follow-ons in the US are up 180 per cent year on year, but almost two-thirds of the deals were priced below the companies’ IPO, according to a Financial Times analysis.
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“Investors can’t wait forever,” said one senior equity capital markets banker. “The view that firms can’t do a deal unless there’s been a specific return since the IPO or if it’s below where they’ve sold stock in the past, I think that’s gone out the window.”
The most extreme discount to an IPO price came in March, when Blackstone sold a 10 per cent stake in dating app Bumble for just over $300mn, about half of what it was worth when it went public in 2021. Blackstone and Bumble founder Whitney Wolfe Herd sold shares at $22.80 each, compared with $43 per share at its IPO in early 2021.
Other major groups who sold stakes in portfolio companies at a discount to their previous price include Apollo, General Atlantic and Vista Equity Partners.
The sales are unlikely to lead to actual losses for the private equity sponsors. Blackstone, for example, had already recouped the $3bn it paid for a majority stake in Bumble in 2019. But the willingness to accept smaller profits suggests that groups have stopped waiting for a shift in equity valuations as they look to return capital quickly to limited partners.
Many of these private equity groups are at present raising funds, and the sales are helpful to their efforts to raise new investor cash for corporate buyouts in an otherwise weak market. Vista has been particularly active in recent quarters selling assets for a profit, having agreed the $4.6bn sale of Cvent to Blackstone in March and a flurry of sales last year.
Despite the lower prices, the pick-up in follow-ons is an encouraging sign for those hoping to see a revival in the market for IPOs later this year. IPOs are riskier than sales in existing public groups, so bankers have said a steady supply of follow-ons would be an important precursor to a pick-up in new listings.
Private equity investors have raised $6.7bn in follow-ons so far this year, compared with $6.3bn across the whole of last year. Including non-private equity-backed companies, follow-on deals are up 86 per cent year on year.
Private equity selling has not picked up as broadly in Europe. But this week Blackstone sold more than $3bn in shares in the London Stock Exchange Group, realising more profits from its wildly successful carve-out of the Refinitiv data business from Thomson Reuters.
