Private equity circles fallen stars of pandemic IPO boom

Three-quarters of U.S. companies that listed in 2019-21 now trade below offering price

By Sujeet Indap and Nicholas Megaw

People wait in line for T-shirts at a pop-up kiosk for the online brokerage Robinhood along Wall Street after the company went public with an IPO on July 29, 2021 in New York City. PHOTO BY SPENCER PLATT/GETTY IMAGES FILES

Three-quarters of large U.S. companies that went public during the pandemic bull market are trading below their offering price, forcing some once-promising names back into private hands at fire-sale valuations.

Of more than 400 listings where companies raised at least US$100 million between 2019 and 2021, 76 per cent are below the price at their initial public offering, a Financial Times analysis of Dealogic data shows. The group’s median return since their respective IPO dates is negative 44 per cent.

The laggards include such-hyped stocks as Robinhood Markets, Lyft and DoorDash, all of which went public during a market boom that ended in late 2021. The Nasdaq Composite index that contains many growth companies has fallen 32 per cent this year.

With share prices plunging, private equity groups are aggressively circling newly public companies as potential buyout targets, several Wall Street executives said. And some corporate boards have been receptive.

“When you think about the amount of private capital that has been raised that hasn’t been deployed, then look at how public equity valuations have re-rated, it feels like it’s going to be a natural pairing up,” said David Bauer, who runs equity capital markets at KKR, the investment group known for its private equity business.

ForgeRock, a business software company, last week announced it would retreat to the obscurity of private markets just over a year after its September 2021 IPO, agreeing to sell itself to the private equity firm Thoma Bravo for US$2.3 billion.

It was a bitter pill. ForgeRock’s stock price almost doubled after its New York listing, giving it a market capitalization of about US$4 billion. Chief executive Francis Rosch said that merely being publicly traded added cachet and ultimately shareholder value.

“[T]he market awareness of ForgeRock is growing…and I think certainly…the IPO is going to help in that as well,” the chief executive told investors last November.

Yet with the 2022 rout in growth stocks, ForgeRock’s share price fell as much as 50 per cent below its listing price. Even with the 53 per cent premium that Thoma Bravo has agreed to pay, the takeover price is almost a tenth below ForgeRock’s IPO price.

With the Federal Reserve committed to raising interest rates and the economy seemingly headed for a recession, directors and shareholders of many businesses better known for breakneck revenue growth than profitability will face agonizing choices over whether to accept offers from private equity firms or deep-pocketed strategic rivals looking for bargains.

“If the stock market has moved down and research analyst price targets have moved down…as a board you have to pay attention to those things,” said Ted Smith, co-founder of Union Square Advisors, a technology-focused boutique investment bank.

Previous euphoric valuations may no longer be relevant, he added: “If you are two years from your IPO and an initial price spike, then the company’s current market price is much more important to assessing value in a potential transaction.”

As the stock market sells off indiscriminately, investors are trying to differentiate between target companies with a promise of profitability and those that simply surfed the pandemic market frenzy to achieve a listing.

Just a week before the ForgeRock announcement, the online marketplace Poshmark sold itself to the South Korean conglomerate Naver for just US$1.2 billion, a price that was a nearly 60 per cent discount to its IPO price.

A bellwether of the public-back-to-private trend was the direct-to-consumer mattress company Casper Sleep, which in 2021 sold itself to a private equity firm for less than US$300 million, well below its equity valuation upon listing in 2020. According to securities filings it only forecast hitting positive free cash flow in 2024, of US$18 million.

Bauer said there was a split between companies that went public too early and face questionable business models and those that have a long-term future but “don’t want to have to work through growing back into those earlier valuations as public companies and would rather do it in a private context”.

Industry observers said that among potential buyers of fallen IPO stars, private equity specialists could be more aggressive than other listed companies. U.S. private equity firms are also sitting on more than US$500 billion of dry powder to invest, according to Preqin.

Listed corporate groups have their own falling stock prices to worry about and investors who prefer they steer clear of risky deals in a time of uncertainty. Shares of Naver have fallen 15 per cent since it announced its purchase of Poshmark.

While scores of new public companies’ share prices remain deeply underwater, some remain buoyant. Healthcare services groups One Medical and Signify Health have recently announced deals to be sold to Amazon and CVS Health, respectively, at prices that top their IPO values. Airbnb, Zoom Video Communications and Chewy all trade at levels well above their IPO prices.

Still, a continuing bear market may force difficult decisions at more beleaguered companies.

“It’s really hard to be a public company these days,” said one prominent private equity investor. “Good news falls by the wayside and bad news is punished. It is the worst of both worlds.”

Additional reporting by Antoine Gara

© 2022 The Financial Times Ltd

Source: Financial Post