Why are so many newly floated companies being taken private?

Receive free IPOs updates

We’ll send you a myFT Daily Digest email rounding up the latest IPOs news every morning.

Craig Coben is a former global head of equity capital markets at Bank of America and now a managing director at Seda Experts, an expert witness firm specialising in financial services. Per Einar Ellefsen and Gautier Rousseau are founders and, respectively, CEO and CIO of Amundsen Investment Management.

Private equity have been taking stock market-listed companies private for many years. But now public-to-private (P2P) deals have a special twist: many now involve companies that have recently gone public and have performed well post IPO. That is a sign of public market failure.

2023 has so far featured more take-private announcements than IPOs. According to Ernst & Young, take-privates have accounted for around 80 per cent of all private equity transactions so far this year and for the ten largest deals. This is the opposite of what you’d expect; after all, stock market indices are up in 2023 and flirting with all-time highs, and it has become more challenging for private equity funds to raise debt to fund their purchases.

And the announcements keep coming. On 15th June, Bain Capital, the private equity firm, made an all-cash bid for Swiss software management group SoftwareOne less than four years after its successful IPO. The offer has been rebuffed as too low, but that will probably not be the end of the story.

What’s particularly striking about the current vintage of take-private targets is that like SoftwareOne, many of them went public only recently. They have barely had time to mature as public companies, but the market has found their tannins unappetising.

This happens normally when a recently-IPO’d company blows up: for example, a high-tech company might float on a post-gravitational valuation of euphoria and hype. When the company misses forecasts by a country mile, the stock collapses to a fraction of its IPO price. Then a bidder comes along to buy it. The take-private is as much a mercy mission as it is an acquisition. 

But that’s not the case with these recent “P2P2Ps” (private-to-public-to-private). Many of these companies went public and met expectations. Managements delivered on their promises. Investors had little cause for complaint. And yet the shares drifted down and then, like Samuel Coleridge’s Ancient Mariner, got stuck in the doldrums:

Day after day, day after day,

We stuck, no breath no motion,

As idle as a painted ship 

Upon a painted ocean

Take the example of OPDenergy, the Spanish renewable energy developer that floated in July last year. The company delivered on its targets, and yet its shares had fallen 16 per cent from IPO before infrastructure fund Antin announced a take-private this month — at a 46 per cent premium to spot (23 per cent premium to the IPO price). Never mind…..

The P2P2P phenomenon is another sign of the public equity market dysfunction that has caused much disquiet all over the world (and especially in London). A company lists on a stock exchange for the price discovery and liquidity it affords. But virtually every IPO in Europe this year has traded down at the outset, amid often thin trading volumes. In many cases, companies can’t use shares as an acquisition currency because the price is so low that it becomes punishingly dilutive. The public markets are often not fit for purpose.

And then private equity can opportunistically pick off the assets they want, sometimes at a deep discount to the recent IPO price. Some of the most striking P2P2Ps involve take-privates by the same private equity firm that had taken the company public in the first place. The chart below shows some examples of P2P2Ps in Europe, but the US has also had its fair share.

It’s almost as if a parallel market has emerged, with large blocks of high-quality companies changing hands at a premium to the less liquid, smaller sizes traded on exchange.

There’s nothing nefarious going on. Financial markets aren’t a morality play. Private equity have a responsibility to their limited partners (ie end-investors) to maximise returns and have every right to leverage their inherent advantages, such as lower mark-to-market volatility, the ability to address issues away from the public market limelight, and often longstanding familiarity with the asset. 

But the net effect is that the broad swath of public market investors misses out. Stock markets are supposed to “democratise wealth creation”, but most of the benefit here accrues to the relatively few parties able to invest in private equity. If the public doesn’t gain from corporate value creation, support for business-friendly policies dwindles.

There is little, if any, academic work to explain why newly-IPO’d companies are going private so soon after listing. We can proffer a few theories:

1. Public investors are failing to value recently-listed companies properly. It is a challenge to become an expert in a short period of time in a company that you don’t have a history with. Without much inflows, fundamental stock pickers stick with the names they have, and a kind of portfolio inertia sets in. 

2. IPO’d companies don’t have the right shareholder base. Long-only investors have disappeared as money has moved in favour of indexation or long-short strategies. Long-short hedge funds are now pivotal to an IPO, but their strategies rely on the involvement of long-only investors. Like travellers who don’t want to visit places packed with other tourists like themselves, these investors don’t want to own a stock crowded with their own kind. And inclusion in major indices, like FTSE and MSCI, takes too long — usually nine to 12 months — to generate liquidity near-term.

3. IPOs are priced too high and don’t leave enough on the table. This happens because a lot of IPOs aren’t raising money for growth, but rather enabling shareholders to take money off the table. And those selling shareholders are acutely price-sensitive in a way that companies raising new growth capital aren’t. With limited upside comes limited market excitement, and so the new stock market entrant never develops a fan base.

If these theories have some basis, then a good start will be for policymakers to pass reforms to encourage more long-term equity investment by both institutions and retail. And for IPO participants to rethink the way they price and structure new issues. 

Regardless, it is a troubling sign of market decay that otherwise healthy companies go private so soon after going public.