By Jason Menghi & Heather Gates, Deloitte
How private equity (PE) investors can help
Initial stock offerings are skyrocketing, heightening pressure on private companies to prepare to go public. The to-do list is long, covering management to financial systems to future performance projections. Many organizations don’t realize that private equity (PE) investors can be a valuable resource.
The IPO window is open
The floodgates have opened for late-stage growth companies backed by venture capital (VC) to finally go public. Although the initial months of COVID-19 caused volatility and uncertainty in the markets, initial public offerings (IPOs) took off in the second half of 2020. The full-year tallies were remarkable: 102 traditional IPOs raised $222 billion, and on top of that, 250 special-purpose acquisition companies (SPACs) raised $75 billion. The total value of VC exits reached a record $290.1 billion, topping the record levels achieved in 2019.
This surge in liquidity has helped provide greater validation around the growing involvement of private equity (PE) investors in later-stage growth equity. Expansion-stage companies that had stayed private for years and reached unprecedented valuations, enabled in part by PE investment, became the year’s biggest IPOs. Airbnb, for example, after taking $1 billion in debt and equity funding earlier in the year from PE investors, became the biggest IPO of 2020 with its share sale in December that valued the company at $47 billion. PE firms’ growth equity investments reached $62.5 billion in 2020, an all-time high, even as the overall value of PE dealmaking declined versus 2019.
All of which bodes well for the VC industry in 2021—and suggests further convergence with PE funds. As exits put money back in limited partners’ pockets and demonstrate the potential for strong returns, investment is likely to flow back into VC funds and the segments of the PE industry focused on growth companies. What’s more, with markets having surged in the second half of 2020, supported by the Federal Reserve and fiscal stimulus, PE investors face a very competitive market for mature companies. This has prompted them to look elsewhere for attractive deals, especially in the technology sector, including the private market for later-stage VC-backed firms.
Being ready to go public
Against the backdrop of strong IPO activity, there is urgency for growth-oriented enterprises to be sure they are properly prepared for going public. The unprecedented number of SPACs shopping for deals—five times as many raised money last year than any prior year1—also increases the likelihood that public ownership could come sooner than expected and before an organization may be ready. SPACs have a limited shelf life (for most, a two-year clock ticking to get a deal done), and additionally, VC and PE investors may be anxious to monetize while the IPO window seems to be wide open, thus accelerating exits.
Deloitte sees five focus areas that will likely go a long way toward ensuring that a company is preparing adequately for public ownership. In each area, we highlight the ways in which PE investors and their representatives on the board can be a valuable resource.