In-depth answers to this fundamental question were provided during the expert session "PE Exit via IPO", which was organised by Loyens & Loeff as part of their Private Equity Expert Series. At the event, held in the firm’s impressive boardroom of their Amsterdam office, capital markets experts Michel van Agt and Menno Baks (respectively partner and counsel at Loyens & Loeff) gave insight into the legal side of preparing for an IPO, while Mark Prins and Maarten Pleun Vrij (respectively Head of ECM Syndicate and Director ECM at ING) shared their experience guiding companies towards a “listing” on behalf of ING.
An obvious reason for portfolio managers to want to steer for a PE exit via an IPO is that of a valuation higher than expected otherwise in the private capital market. Mr. Baks explained that in a so called “dual-track” strategy, sometimes preparations for an IPO are even used as leverage when negotiating with private investors: “we have seen instances where the prospectus was already filed and uploaded in the data room”.
But although the upside of “floating” your asset’s shares on the stock exchange seems apparent, all four speakers agreed that a decision to exit via an IPO should not be taken lightly. Preparing to “go public” may take years and at considerable cost, while in the end its success in great part comes down to the credibility of the company among potential investors. Mr. Vrij: “next to a compelling equity story, the management of a company is very important to convince public investors. There can be great managers but they may not be best equipped to lead a listed company, manage shareholder expectations as well as governance requirements involved or handle potential public scrutiny”. Adding to that, Mr. Baks pointed out that the independence of supervisory or non-executive directors is also of major importance: “when preparing for an IPO and certainly when marketing the deal, investors tell us this independent supervision is crucial in forming their opinion about the company”.
Another key topic when planning for an IPO is deciding on what stock exchange to list your asset. Mr. Baks: “where you will list affects your investor audience and the depth of the capital market you can tap at the time of the IPO but certainly also going forward”. In this respect also the asset’s size is relevant. Mr. Vrij: “if you list with a 1 billion market cap, you may be overlooked on the NYSE or the Nasdaq, whereas for instance on Euronext Amsterdam you may be a fair-sized small or midcap company”.
In the context of deciding where to list, Mr. van Agt explained that the N.V., the legal entity commonly used in the Netherlands to list a company, can actually also be used for listing on foreign stock exchanges and which has been done successfully many times. This holds the advantage that multiple shareholder voting structures can be maintained upon issuing shares publicly instead of a “one share one vote” structure commonly required in other jurisdictions. Also, the legal “real seat” principle does not apply, meaning that a company may have their head office in for instance Germany, France or Spain, while being listed in for example New York. These advantages are derived from the Dutch corporate law framework and which pertains that when a company is incorporated under Dutch law, it is a Dutch company and therefore Dutch law applies. Or, as Mr. van Agt put it: “This flexibility makes us a bit of the ‘Delaware of Europe’”.
On the road to a successful IPO of your portfolio company, timing the market is another crucial aspect. Mr. Vrij: “during the preparatory process you work to prevent any delays, so that when the market is there, you have the ability to go”. This however means dealing with aspects that may not always be easy to plan, for instance preparing the three year financials mandatory under European law. Mr. Baks: “the whole process is heavily regulated and these historicals are also prepared in accordance with IFRS-EU accounting principles, or in limited circumstances IFRS-IASB or another equivalent accounting standard The conversion of financials from local GAAP to IFRS-EU may take a lot of time”.
Assuming PE managers have gone through the intricate and time consuming preparation process and are now ready to go public, would the current market be right? Mr. Prins explains that at first glance this may seem the case, as equity markets have performed unexpectedly well this year. But taking a closer look, it is very much a debated rally, with Europe and Japan showing strong performance across the board while in the United States only a handful of tech-giants have fueled the current upswing. Investors therefore have turned cautious, as evidenced also by their portfolios currently being “overweight” in bonds at the highest level in eight years. Another doubtful telltale is the fact that there are currently more public companies delisted than private companies taken public. Mr. Prins strikingly: “I am not going to sugarcoat this, the market is still open but it is a struggle”. Only to continue moments later: “But it is not all doom and gloom. On the back of an expected end to interest rate hikes and improving economic conditions, the window for the IPO market will be more open by late 2023 and early 2024”.