PE firms sell shares at a discount as they expect valuations to remain low

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Private equity firms are increasingly selling shares in portfolio companies at a discount to the price at which they went public, a sign they don’t expect stock market valuations to regain previous highs anytime soon.

So-called “follow-up offers” of shares in previously publicly traded companies are a key way for private equity firms to monetize their investments and return money to investors. Sponsors traditionally sell a fraction of their portfolio company in an initial public offering, then seek to sell the remainder of the stake at increasingly higher prices in subsequent years.

Follow-ons were hit hard by last year’s stock market declines, with PE-backed company sales falling more than 70%, according to Dealogic data, as investors hoped to ride out the recession.

However, sales have started to rebound despite the fact that valuations of more recently listed companies still languish well below their highs.

PE-backed follow-ons in the US are up 180% year-over-year, but nearly two-thirds of deals were priced below the companies’ IPOs, according to an FT analysis.

“Investors can’t wait forever,” said a senior equity capital markets banker. “The view that companies can’t close a deal unless there’s been a specific return since the IPO or if it’s lower than where they’ve sold shares in the past, I think has gone out the window.”

The most extreme discount to the price of an IPO came in March, when Blackstone sold a 10% stake in dating app Bumble for just over $300 million, about half what it was worth when it went public in 2021 Whitney Wolfe, founder of Blackstone and Bumble Herd sold shares for $22.80 each, up from $43 per share at its IPO in early 2021.

Other major firms selling stakes in portfolio companies at a discount to their previous price include Apollo, General Atlantic and Vista Equity Partners.

The sales are unlikely to lead to actual losses for PE sponsors: Blackstone, for example, had already recouped the $3 billion it paid for a majority stake in Bumble in 2019. But a willingness to accept smaller profits suggests the companies have stopped waiting for a shift in stock valuations as they seek to quickly return principal to limited partners.

Many of these private equity firms are currently raising money, and the sales are helping their efforts to raise new investor cash for corporate acquisitions in an otherwise weak market. Vista has been particularly active in recent quarters selling assets for profit, having agreed to the $4.6 billion sale of Cvent to Blackstone in March and a flurry of selling last year.

Despite lower prices, the rebound in follow-ons is an encouraging sign for those hoping to see a recovery in the initial public offering market later this year. IPOs are riskier than sales in existing public groups, hence bankers they said a steady supply of follow-ons would be an important precursor to a resurgence in new listings.

PE investors have raised $6.7 billion in follow-ons so far this year, up from $6.3 billion for the full year last year. When companies not backed by private equity are included, follow-on deals increased 86% year over year.

Private equity sales have not increased as widely in Europe. But Blackstone sold more than $3 billion in shares on the London Stock Exchange this week, making bigger profits from its hugely successful carve out of data business Refinitiv from Thomson Reuters.