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Exit routes wind past a dormant IPO market

The first half of 2022 has been one of the worst in recent memory for IPO exits. With large amounts of liquidity still in the M&A market, an acceleration of exits to private strategic buyers may follow…

With the IPO market grinding to a veritable halt in 2022, GPs are looking for other exit routes in the second half of the year, with private M&A channels taking the lead. 

Those with assets for sale are being advised to take advantage of the current environment and accelerate these processes in the event of a near-term reversal of fortunes. 

“If I had a portfolio with a select number of companies which needed to be exited, I would definitely try to accelerate the process,” says Marco Belletti, CEO of Italian buyout firm Azimut Libera Impresa. “We’re not sure how the next few months will evolve and if this window of opportunity closes suddenly, then you may have to wait one or even two years to reopen the cycle.” 

The market is currently in a “perfect curve”, he says, having come through the recovery from 2020, achieving extraordinary results in 2021; and it still has legs in 2022. 

“We have seen companies in almost all sectors continue to grow. A few may have lost one or two points of profitability because of rising costs of raw materials and energy but it’s still a solid market.” 

Exit slowdown 

Such an acceleration would follow a slowdown in exit activity since the beginning of the year. Data from PitchBook finds US PE exit value dropped to an estimated $90.1 billion in the first three months of 2022, which is a 57.5% decrease over the previous quarter. 

Discussing the various options available to GPs looking to sell assets, Georges Gedeon, managing partner, at alternative strategies firm Antler Capital Partners, says: “If you want to take the traditional exit route through a dividend recap, it is very difficult to finance in this current environment. Access to public markets is also hard and I haven’t seen a major IPO in a few months at least. The other alternative is to sell to another financial sponsor or to a corporate, knowing that both are facing an unattractive financing environment.” 

Coming off a stellar 2021 for exits, IPO activity this year has been lacklustre, to say the least. Schroders Capital wrote earlier this year that “2022 is shaping up to be the worst year for IPO volumes for a long time”. 

Prolonged inflationary headwinds, projected interest rate hikes, geopolitical conflicts, and the subsequent volatility of capital markets are all contributing to this but there are still a few sectors that may work well for an IPO exit route, says Belletti.

“As a private equity house, in today’s markets we are only considering IPOs when we are dealing with a sector which has proven to be somehow less linked to volatility with resilient business models and profitable growth, while incorporating ESG (environmental, social and governance) issues as part of their core corporate values – One which has been found to be watertight; bulletproof.

“Technology and energy, especially energy transition, are two examples. If I were to IPO a company in such sectors, I can still consider a stock exchange listing as valuable, given the appetite we still observe in these sectors. A listing in such sectors wouldn’t see the devaluation of my assets.”

However, a partner ina major UK private equity firm believes some tech companies in haste to float might struggle in 2022: “It [the stalling of the IPO market] is going to be a bigger issue in the tech space, for companies that just have to IPO because they need the money and might be still burning cash.” 

In using the M&A market, an exit may be constrained by the amount of debt financing available to prospective buyers. This situation may favour strategic buyers – large companies with deep pockets that can still raise money at attractive spreads. 

Good buyers 

For Justin DeAngelis, co-head of sustainable infrastructure at investment firm Denham Capital, financial or strategic exit routes have always been more suitable. 

“Large – $10, $15 billion – infrastructure funds have to deploy a significant amount of capital which is what makes them good buyers for the businesses we build. There are also many strategic players who are looking to deploy capital and grow their sustainable infrastructure footprint. We have interest from both types of buyers all over the world.” 

Commenting on the firm’s exit plans in general terms, DeAngelis says Denham has some mature portfolio companies which are ripe for sale: “We are a buyer and a seller. We continue to build up the value of our infrastructure businesses block by block. We have an exit plan for each one of those portfolio companies and I am always open to selling as well as buying and putting more capital to work.” 

He believes there is definitely an exit opportunity in the market right now but envisages the most attractive routes to be through private transactions. 

“A high percentage of our business sales are done through private deals – corporate, strategic or financial investors. We don’t have explicit preferences in terms of the type of buyer as that largely depends on where they are and when they need to put capital to work.” 

Belletti underscores the current appeal of private transactions: “The private market exit is the one I would consider most compelling for my strategy, given the large amount of liquidity available. Notwithstanding inflation or the increase of raw materials, private markets are still a worthy exit route for all sectors.” 

With M&A deal volume down in H1, a report by PWC claims: “The near-term investing climate is likely to be a test for this generation of private equity firms, most of which saw their fortunes increase in the last decade. Performance could start to diverge as the cost of debt rises and exits are more difficult.” 

In the view of DeAngelis, the tipping point could be a realisation that within some recent market “seller-friendly deals, valuations were too high and getting the expected returns might be a stretch.”

However, he, and other industry experts, expect activity to pick up given the high levels of dry powder. 

“There is still tremendous amount of capital pouring into the space, chasing sustainable infrastructure. So, I still see some frothy transactions getting done. It will be interesting to see how an increase in rates and inflation will affect the overall market though.” 

Belletti concludes: “Private equity has been proven to be one of the most resilient industries through decades. Operating in the private markets means we set the value so there is no concern about the exit strategy for our portfolio companies. There will always be appetite for good companies in strong sectors.” 

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