Going Private Again Is The New Trend On The Menu

With the start of the year, a growing number of newly public companies are changing course and going back to being private again. 10 companies that went public in the boom years of 2020 and 2021 have decided to sell themselves to private equity firms. As the US economy headed towards a downward trend in its economic cycle, a majority of the 2020-2021 class of initial public offerings have had a dismal performance, resulting in the decision to go private once again.

Grill maker Weber agreed to be bought out by BDP Capital Partners in December of last year  for $8.05 a share, well below its $14 IPO price less than 18 months earlier. Sumo Logic Inc. agreed in February to be bought by private-equity firm Francisco Partners for $12.05 a share, down from the data-analytics software company’s $22 IPO price. However, not all companies are selling at a loss. KnowBe4 Inc. in October agreed to go private again in a deal with Vista Equity Partners, that valued the cybersecurity firm at around $4.5 billion, a higher price than its IPO.

 

We have seen a sudden shift from firms rushing to get out the door for an IPO via different mechanisms like SPACs, to an environment where newly listed firms are pondering a return to the private markets. This can be attributed to the rise in interest rates, as a response to growing concerns over rampant inflation initiated by quantitative easing that was introduced as a response to COVID-19. This jump in interest rates and a sharp decline by stocks have since soured investors on new issues and brought the IPO market to a virtual standstill. As a result, some of the biggest companies waiting in the wings, such as fintech giant Stripe Inc., aren’t expected to list their stocks until late 2023 at the earliest.

 

There are two sides to this coin and it seems private equity firms are eager to scoop up these companies at discount prices. These firms are working to create exit opportunities as they are under pressure to return capital to their fund backers. Since debt necessity is the driving force behind a majority of modern private equity deals, and cheap borrowing no longer being on the table, PE firms have to adapt. For example, Vista already owned some of KnowBe4, due to an earlier investment.  By sticking with an already-backed holding means a smaller incremental check and possibly at a cheaper price. As this economic environment continues, PE firms will continue to dig deep into their bag of tricks as it’s no longer as easy as it used to be.