Days between IPO and First Secondary Offering – Dealogic
Newly-listed companies are sprinting back to the market.
IPO companies have waited an average of just 598 days before coming to market with a secondary share offering so far in 2018, according to Dealogic. That’s the lowest figure on record and well below the average of 1,020 days since 2000.
One big driver appears to be private-equity investors who are keen to cash in. Once they sell, they return the proceeds to investors in their funds and can begin the process of raising money for new vehicles.
Indeed, the average number of days before a secondary for private equity-backed firms was just 536 so far this year, Dealogic says. And since 2000, the average has been just 633 days.
Of course, private equity funds earn management fees on investments before they monetize them. That raises the question of why they’re in such a hurry to give the money back.
A likely explanation is that private-equity funds are getting larger and larger. There’s no incentive to sit on a $10 billion fund when you could possibly work on raising a $20 billion fund.
But just how early can secondaries happen? In the vast majority of deals, companies have a so-called lockup agreement preventing pre-IPO shareholders from selling more shares in fewer than 180 days from the initial float.
The reason is that most investors want to see a company demonstrate two quarters of healthy results after going public. The first quarter is usually easy enough for a company to forecast, so they rarely miss those estimates. But the second quarter is a more challenging test.
Also, it’s a bad sign if pre-IPO investors appear hurried to get out of a stock. It can signal a lack of confidence in a company’s prospects, putting shares under pressure.
But in some cases, companies are able to waive the lockup. That is simply a matter of getting permission from an underwriter rather than a regulator.
The fastest secondary so far in 2018 was an $837 million offering from BJ’s Wholesale Club Holdings. The company waited just 91 days to come back to market.
The sellers? As might be predicted, private equity firms Leonard Green & Partners along with CVC Capital Partners were the source of all shares sold. They made out well, selling at $26 a share compared with the IPO price of $17.
In other cases, companies themselves are keen to raise cash. Take PagSeguro Digital, a payments company that’s akin to the Square of Brazil, which is growing rapidly and in need of capital. It waited just 149 days – short of its 180-day lockup – to conduct a secondary offering. That $1.1 billion share sale consisted of both new shares and some from pre-IPO stockholders.
The big question is whether the aggressive secondary sales should worry investors. In the case of PagSeguro, shareholders initially were spooked by the secondary offering but later reassured as the company posted strong results. And the stock looks reasonably priced at 12 times 2019 consensus earnings.
But investors should remember that private equity has a knack for selling at the top. Blackstone, the largest private-equity firm in the world, went public in June 2007 – a year before the market collapsed.
John Jannarone, Editor-in-Chief