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Nordic private equity fund manager EQT Group is drawing up plans to hold private stock sales for its portfolio companies because public markets have proven unreliable to exit investments.
EQT chief executive Christian Sinding said private auctions among its 1,100 limited partners could provide a novel way for its backers to monetise their illiquid holdings without the need to sell shares in initial public offerings.
The preliminary plans have been driven by what Sinding described as “dysfunction” in the IPO markets, he told the Financial Times.
The comments come as the volumes of new offerings in Europe have slumped to their lowest level since the 2008 financial crisis and private equity firms have a harder time selling down their stakes in portfolio companies.
A slowdown in dealmaking and lack of IPO prospects have prompted fund managers to embrace more creative financial engineering techniques to return capital to their LPs.
In EQT’s plans, the firm would hire an investment bank to build a book of interested buyers and sellers of a single private investment, much like the process of hiring underwriters for a traditional IPO.
The underwriter would lead negotiations on pricing, but instead of soliciting investment from public market investors like hedge funds, mutual funds and other large institutional investors, they would focus on EQT’s existing investors. The private transaction would give investors in the private company the ability to sell shares, or simply hold them. Others would get the chance to buy.
“As long as the price is set in a fair way at a fair market value, it doesn’t really matter that the transaction is private,” said Sinding. “Why go public if we actually don’t need to?”
Sinding acknowledged that the idea was untested and could change with investor feedback. For instance, in IPOs, investors often don’t wind up receiving full allocations, something that might anger some investors, while others would like to sell more stock than they can.
These deals would differ from so-called “continuation funds,” an increasingly common private equity tactic where firms solicit specialised secondaries funds to buy an individual portfolio company, or a group of companies, from a fund, said Sinding.
In these deals, exiting investors sell their investment to the secondaries buyers, who commit to a new “continuation” fund alongside the investors who choose to roll their investment into that new fund. Private IPOs may be more cost efficient, said Sinding, because secondaries funds often come with layers of fees.
“This is not really happening yet, but it’s kind of the next generation of continuation of vehicles,” he said.
EQT, which manages €224bn in assets, has been frustrated with IPO drawbacks including their access to a limited pool of potential buyers, mostly hedge funds, which may own shares for a short period of time.
Exchange traded funds often are not in a position to buy companies until they are included in main stock indices. Active investment managers, meanwhile, have struggled to maintain their assets, cutting into availability of capital for newly listed companies.
“There’s dysfunction in the IPO market . . . The barriers are actually quite high,” said Sinding.
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