With the number of IPOs down globally and London losing high-profile listings to the US, trade sales and the secondary market will be key this year
This article first appeared in the April 2023 UK Insights Report
With the number of IPOs down globally and London losing high-profile listings to the US, trade sales and the secondary market will be key this year
Given the pronounced market volatility, it’s no surprise that global private equity exit value fell by almost a third last year, compared to 2021’s record. IPOs were particularly weak but concerns in the UK have been more pointed after it lost out to the US on high-profile listings such as Softbank-owned chip giant Arm in March.
According to data from KPMG at the end of last year, funds raised by companies listing in London plunged by more than 90% in 2022, with not one blockbuster IPO during the year. High-profile London debuts in 2021 such as fintech firm Wise, delivery company Deliveroo and shoemaker Dr Martens, were also all significantly down on their listing prices towards the end of the year.
As it typically takes up to six months to prepare for listing, 2023 started with optimism for a wider re-opening of the UK IPO market in the second half of the year but recent volatility in the bank market following the crises at Silicon Valley Bank and Credit Suisse present another challenge. Private equity managers in the UK are also increasingly looking to the US where valuations and regulation are perceived as more attractive. In a survey by Private Equity Wire in March, 63% of respondents chose the US as a more attractive IPO destination, compared to only 28% for the UK.
“The US IPO market has a lot more depth, and traditionally there has been a lot more pragmatism from investors in the US capital markets which is why you see that market re-open much faster than the rest,” says a partner at one of the UK’s largest private equity houses. “In the UK historically there has been a much narrower group of institutional investors that tend to drive the outcomes of IPOs which need to be onboard for an equity issue to succeed.”
With energy and natural resources accounting for the most UK IPOs last year, there is a fear among private equity firms that UK stock markets are undervaluing tech companies and other businesses that require exit in 2023. When asked which sectors will lead the opening of the IPO market, a KPMG survey at the end of last year found three out of five equity capital market leaders pointing to energy and specifically energy transition or renewables. While several other key sectors were mentioned such as business services, tech or tech-enabled companies, healthcare and financial services, some expressed the view that companies coming to list will be defined first by quality rather than sector.
“There is some sense that IPO activity could make a broad return in the second half of the year, with some pockets of activity even before that,” said Patrick Molyneux Partner, KPMG Acceleris in KPMG’s UK Mid-Market Review. “ESG businesses could be particularly compelling; while we might not see IPOs in the space right away, we could start to see companies beginning the work required to become IPO ready.”
To be sure, many tech companies have traditionally chosen the US Nasdaq exchange over London, but the UK government is planning an ambitious set of reforms to boost the attractiveness of a UK listing, expected later this year.
Sizing the market
There is no one-size-fits-all approach to exits and the majority of high-growth UK exits are historically made up of acquisitions rather than IPOs. UK exit strategies, as elsewhere, differ based on size, sector and length of private equity ownership. In a more subdued IPO market, such other exit routes will rise in prominence. Last year, trade sales took a larger portion of overall private equity exits than in any of the previous four years, according to S&P Global Market Intelligence. Trade sales, sponsor-to-sponsor transactions and the secondary market are all likely to be key features of the UK private equity market during 2023.
There are nearly 1,800 UK-based, PE-backed UK businesses that have been within a PE portfolio for three years or more – almost half of the portfolio company base, wrote Jasper Van Heesch at RSM UK in a February note. Considering that PE’s typical holding period is three to five years, many of these companies will be seeking new backers and a sale to a PE-backed company is a key consideration, he believes.
Continuation funds – where a fund holds onto a company for longer and continues to add value before exiting at a later date – are also jumping up the list of exit options. Around 150 GP-led transactions were launched globally last year, with the average transaction size sitting at just over $600million, according to Credit Suisse’s 2022 Secondary Market Review. The bank expects GP-leds to bounce in volume globally this year as a result of the fall in exits last year. The UK market will be no exception.
