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PE Buybacks Trend: Insight from Squarespace Deal

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Permira has announced a $6.9 billion deal to take website builder Squarespace private.

The transaction represents a significant premium over Squarespace’s current market capitalization, underscoring the confidence Permira has in the company’s growth potential.

It has also has shone a spotlight on a growing trend in the investment landscape – the increasing propensity of private equity firms to buy back publicly-traded companies.

The once-booming initial public offering (IPO) market has taken a sharp downturn in recent years, with activity hitting record lows not seen since 2016. Factors such as rising interest rates, tightened lending, and ongoing market volatility have conspired to create an unfriendly environment for companies seeking to go public.

However, the residual effects of this “IPO winter” are now becoming increasingly apparent, as some firms that braved the challenging conditions have struggled to meet shareholder expectations post-listing.

The rise of PE

Private equity (PE) firms are actively buying back and re-privatizing companies that experienced unsuccessful IPOs and delivered lackluster performance since going public.

The IPO market has faced significant headwinds in recent years, with 2022 and 2023 seeing historically low levels of activity. This trend can be attributed to a confluence of macroeconomic factors, including:

High Interest Rates and Tight Lending Conditions

The Federal Reserve’s aggressive interest rate hikes have made borrowing more expensive, deterring companies from pursuing IPOs. Tight lending conditions have also made it more challenging for firms to secure the necessary financing to go public.

Recessionary Fears and Market Volatility

Concerns about a potential economic downturn, coupled with ongoing market volatility, have dampened investor appetite for new public offerings. Companies are hesitant to take the risk of listing their shares in such an uncertain environment.

Weak Equity Markets

The broader decline in equity markets has also played a role in the IPO slump. Investors are less willing to commit capital to new public offerings when existing stock prices are under pressure.

As a result of these factors, the IPO pipeline has slowed to a trickle, with many companies postponing or withdrawing their public offerings. However, the impact of this challenging environment extends beyond just the IPO market, as M&A activity has also fallen to its lowest level in a decade globally.

A Flurry of Private Equity Bailouts

Endeavor Holdings (NYSE: EDR)

Endeavor Holding’s debut on the NYSE in 2021 was the first of its kind for an entertainment and talent company, but it was not the first time the conglomerate attempted to go public.

In 2019, Endeavor Holdings experienced two failed IPO attempts, amid exaggerated valuations and significant debt levels. In October 2023, Silver Lake announced plans to re-privatize Endeavor, just two years after helping to take the company public.

SUSE (SUSE: Frankfurt Stock Exchange)

SUSE, a global open-source software company, joined the IPO boom in 2021 with its listing on the Frankfurt Stock Exchange, backed by Swedish private equity firm EQT. However, in August 2023, an agreement was reached for EQT, a 79% equity owner, to take SUSE private again.

Analyst research and an expert interview with a former SUSE salesperson, sourced from the AlphaSense platform, reveal key detractors of SUSE’s performance, including slower Linux customer adoption, increasing competition, data security and infrastructure issues, and leadership turnover.

Recent IPO Failures: Cautionary Tales

For firms that braved the ‘IPO winter’ of 2023, some experienced disappointing debuts to the market, bearing similar characteristics to the instances of private equity buybacks discussed earlier.

Instacart/Maplebear Inc (NASDAQ: CART)

Instacart (CART) listed on Nasdaq in September 2023 and within two days plunged 11%, losing nearly all its IPO gains.

Birkenstock (NYSE: BIRK)

Birkenstock made its long-awaited debut on the NYSE in October 2023, but the stock tumbled more than 20% in its opening week, making it the worst debut by a company worth over $1 billion in nearly two years.

Analysts point to exaggerated valuations that set Birkenstock’s IPO price at an artificially high level, despite the company’s differentiated operating model and retail stronghold in the US and Europe.

 

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