Amid skyrocketing valuations in public markets, IPOs are making a comeback in private equity.
The go-public exit route clocked its highest quarterly value in five years in the US, bringing in a total of $21.8 billion in 2Q, according to PitchBook's
2Q US PE Breakdown. Through the first half of 2019, IPOs accounted for a larger share of overall exit value than any year since 2013. These days, they are as pricey as they are plentiful. The sizable offerings have pushed up the price on individual exits—80% of the companies that conducted IPOs in 2Q had pre-money valuations of $1 billion or more. Furthermore, 58.4% of that figure represents debuts worth over $2.5 billion apiece. IPOs also ate up a larger share of the exit pie in 2Q than in quarters past, representing 35.1% of the total value—the highest proportion in six years.
The public offering of
Grocery Outlet (NASDAQ: GO) represents one such sizable 2Q exit. Hellman & Friedman paid $1.1 million in 2014 to acquire the company from Berkshire Partners, which bought the Bay Area-based discount grocer in 2009. After holding the company for five years, Hellman & Friedman took Grocery Outlet public on June 20. The exit raised around $378 million and gave the business an initial market cap of nearly $1.9 billion.
The average hold time before a PE firm exits an investment is currently six years, as the traditional time frame is gradually growing: A decade ago, three to five years was the industry standard. And while IPOs are often the most profitable exit, they can also be the costliest—and riskiest.
Although public debuts are gaining, exits as a whole are slowing down. Last quarter saw 168 exits, worth a collective $62 billion. That latter figure represents a slight uptick from 1Q, during which the government shutdown stalled dealmaking and particularly IPOs. However, even the livelier 2Q couldn't change the fact that overall exit value and count came in below historical rolling averages last quarter, and 2019 is pacing behind the past few years.
The sheer size of many deals could be behind the exit decline. With larger funds and more add-ons, portfolio companies are becoming larger than ever before. The size alone precludes many buyers from bidding.
As the size of these portfolio companies grows, the chance of exiting via IPO grows with it, according to PitchBook analyst Wylie Fernyhough.
"The US stock market had its best first half of the year in over 20 years," Fernyhough said. "Valuations are high in public markets, and we're seeing exiting to public markets become more accepted if the price is right."
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