PE Outfits Selling More Discounted Shares in Portfolio Companies

Private equity operations are reportedly gloomy about their portfolio companies regaining their high valuations.

That’s according to an analysis published Tuesday (May 23) by the Financial Times (FT), which finds these firms are increasingly selling shares in those companies at a discounted rate compared to their price at which they went public.

As the report notes, these “follow-on offerings” are an important way for private equity (PE) companies to offer a return on investments. When the stock market declined last year, these offerings fell by more than 70%, the FT said.

Now, however, they’ve begun to rebound, even as valuations for recently-listed companies have remained low. Private equity driven follow-ons in the U.S. are up 180% this year, the FT analysis said, even though nearly two-thirds of the deals were priced below the companies’ initial public offering (IPO).

“Investors can’t wait forever,” a senior equity capital markets banker told the FT. “The view that firms can’t do a deal unless there’s been a specific return since the IPO or if it’s below where they’ve sold stock in the past, I think that’s gone out the window.”

According to the FT, the most glaring example of this trend happened in March, when Blackstone sold a 10% stake in dating app Bumble for a little more than $300 million, roughly half its IPO price.

As of last month, traditional IPOs had raised $2.3 billion in the U.S. for 2023, the worst start to a year since 2009. The situation was even more dire last year: listings hit a 20-year low as investors — worried about high interest rates and inflation — avoided high-growth companies.

PYMNTS’ FinTech IPO Index saw a 51% loss last year, roughly comparable with the Global X FinTech ETF 52% decline, with IPO funding falling 68% during the same period.

“Of course, now with the SVB meltdown and general jitters of banks becoming more risk-averse in its wake, funding now may be even more difficult to obtain for FinTechs,” PYMNTS wrote.

Meanwhile, PYMNTS spoke with David Metz, CEO of Prizeout, about how companies can move forward in this tough funding climate.

“In recent years, money was flowing freely, funding was never-ending for ideas that sometimes never came to fruition, and companies without products saw unexpected valuations,” said Metz. “We’re seeing this end, and that’s not necessarily a bad thing.”

He argued the situation will lead to “a lot more intentionality, focus, and direction” on how firms make and spend funds, and argued the “culture of ‘disrupt’” is on hold while the “culture of necessity” is ascendant.

“I predict that the companies left standing in 2023 will be those creating products that are not just ‘cool,’ but rather essential and solving real and tangible problems for all walks of life,” Metz told PYMNTS last week.