December 27, 2013
Interviewed by: David Snow
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The Year Ahead for PE-backed IPOs

What lies ahead for PE-backed IPOs in 2014, according to EY’s Global Deputy Private Equity Leader Mike Rogers.

What lies ahead for PE-backed IPOs in 2014, according to EY’s Global Deputy Private Equity Leader Mike Rogers.

The Year Ahead for PE-backed IPOs

With Mike Rogers of EY

David Snow, Privcap: We’re joined today by Mike Rogers of EY. And Mike, welcome to Privcap today. Thanks for being here.

Mike Rogers, EY: Thanks, David.

Snow: Mike, your firm pays very careful attention to the IPO markets, and especially the ability for private equity firms to take their portfolio companies public. I’m interested to hear what you think lies ahead in 2014 for PE-backed IPOs. Given certain macroeconomic and other conditions, what might the market look like for these firms that have many, many portfolio companies to exit?

Rogers: I think it is critical. You touched on the fact that these funds have a number of companies in their portfolio that they would like to exit. We estimate in some ways that there might be an overhang of five to seven years of normalized exits sitting inside portfolios of private equity firms around the world. The challenge for them is that they need a robust IPO market. There’s always the secondary market; there’s always the strategic sales. But they always need a strong and supportive IPO market.

And what we’ve seen in the last couple of years has been a very volatile market. There have been some good peaks and some other challenges that we faced. But we feel like if 2014 if a couple of things can line up in their favor it should be a very robust year for IPOs.

Snow: You mentioned a five-to-seven-year backlog of IPOs. So, are you saying that even given strong conditions for IPOs, it still might take five years for the sheer number of companies to make it to the public markets?

Rogers: Yes. I think it’s been interesting that there’s been an increase in the number of IPOs. And remember, there was almost a period in EMEA where there were no IPOs done. And, recently, China household regulatory reasons for not issuing any IPOs. So, we’ve been in this period with a very, very low uptake of IPOs. And the US market is kind of leading the market out of that doldrums, if you will.

But we’ve had a number of IPOs come off, but the overhang and the number of companies that are sitting in the portfolios that private equity would like to exit continues to grow. And so I mentioned the five-to-seven years. We’re looking at if we stay at the normal pace that we’ve had IPOs the last couple of years. That would be the time or period it would take to run those off. We anticipate that IPOs will increase in 2014, but only if we get the right set of macroeconomic circumstances over the next year or so.

Snow: Is the, I guess, relative to historic norms, the relative trickle of IPOs really driven by the GP’s, themselves, being cautious about the conditions into which they try to list?

Rogers: Yes. I think the big issue when you’re going to list an IPO is valuation. You want to feel like you’re registering into a market that’s receptive, that has depth and liquidity in it and you don’t want to have a failed auction process as you go to market in the IPO market. So, I think folks are looking around, they’re seeing if I went to market, let’s say, for example, in a period when we’re currently going through this discussion with the US government and the shutdown, the feeling would be by most investors that you may not get your full valuation because there’s a lot of uncertainty in the market.

If we could get through the talk of the tapering and get through the discussion on the governmental shutdown issues, which we all anticipate would be sort of fourth quarter activity, I think the market could open up in the first quarter and you could start to see not only investors have an appetite for IPOs, but the private equity funds feel as if they’re getting the right valuations for those entities and really try and push more opportunities out the door.

Snow: It’s nice to have the optionality to wait around for a great valuation, but a lot of these GP’s are under tremendous pressure from their own investors to show some exit, to show some liquidity, right?

Rogers: Yes, they are. In fact, I think most, you know, wise owners of these companies look at multiple tracks. So, they’re not only looking at the IPO path, they’re looking at secondary sales to other funds, as well as looking at the potential to sell to strategic. And depending on the market, one could possibly by more attractive than the other, but very few organizations that are looking to go through the exit process really have a singular focus. They will try and go down many different paths. So it’s kind of where the opportunity is to place these transactions.

A lot of emerging markets opportunities really looks to the IPO market because historically entrepreneurs in those markets like having public equity as part of their entity, as well as China has been a big driver of IPO.

So, if you think about that, if that market comes back in China, as well as the, sort of the window opening up in the US, I think that could be very positive. We also see a number of companies around the world that do have an interest in coming to the US market. And so it’s not just US companies in the US; it’s companies from around the world that will move to a particular market based on competitive advantage.

Snow: And if you were a betting man, would you bet that global PE-backed IPOs in 2014 will indeed show a greater volume than was shown in 2013 and prior recent years?

Rogers: Well, David, it’s always hard because nobody has a crystal ball in terms of what the economy will look like and some of these systemic issues we’re talking about. You know, will they impact us next year. But assuming some of that gets moderated or sidelined a bit, I would anticipate a much stronger IPO year next year.

If you think about stock indices, they are close to all-time highs, so the valuations are generally there. I think investor appetite is there. There have been a number of sorts of high visibility IPOs that have gone off recently that have gotten a lot of attention that have been over-subscribed. And so I think a little bit of that momentum, coupled with the right market set, could really be the recipe for a great year in 2014.

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