Industry experts expecting SBO hike as IPOs fade in 2016

In late November, unquote" brought together a group of leading private equity practitioners from various corners of the market to discuss industry developments in 2015 in order to assess the outlook for 2016. This instalment focuses on the exit market. 

Participants

• Farah Buckley, Adveq 
• David Burns, Phoenix Equity Partners
• Lars Eriksson, Riverside Partners
• Mounir Guen, MVision 
• Graeme Gunn, SL Capital Partners
• Richard Sanders, Catalyst Corporate Finance
• David Whileman, Inflexion Private Equity 
• Tim Wright, DLA Piper
• Moderator: Alice Murray, unquote"

Alice Murray: A key development in 2015 has been the strong exit environment, generating a raft of double digit returns. Which exit routes have you found to be the most rewarding, and will this continue in 2016?

David Whileman: We've exited eight companies and made great returns across the whole spectrum of processes, including flotations. I don't think we are alone in achieving some extremely good exits, as the market has been delivering some strong valuations.

The other observation is around the processes. They haven't been drawn out and as such have been relatively clean processes. We've found that in virtually all cases where you are selling a quality asset, purchasers were able to transact smoothly aided by strong support from the banks. And I think that's a key factor here - banks have been generally positive this year and really keen to support across the whole spectrum of buyers.

Tim Wright: We've found the IPO market has been strong – a lot of our clients have used it as an exit route. And it has been successful; it's not like 2008 when the industry was vilified, rather unfairly, for some of the IPO exits. PE has been responsible and industry reputation is much better.

David Burns: We've used all three routes over the last year to exit businesses: IPO, trade and PE. But I think it's in that order of ease – an IPO is the hardest to do – the intensity of effort required is of a different order. We used the IPO route for a partial exit – achieving a super result initially and still retaining more than half of our stake.

TW: We see that increasingly with IPOs; PE only exiting a portion. And when they do sell the remaining chunk, they tend to sell that off in block trade, rather than dribbling it out through the market, which is a much more responsible way of doing it.

Graeme Gunn: There is a bifurcation in that though. In the mid-market IPO transactions you can exit via a block trade more easily and manage your stake out. Our experience, after holding a broad set of listed positions across the European market, is that for larger IPOs it can take two to four years to fully exit that stock. For an investor like us it can be a problem as you end up with a broad portfolio of underlying listed stocks rather than returning cash; you become almost a public market investor and there are some clear challenges and risk in managing these exposures.

Mounir Guen: In terms of trade buyers, what are the nationalities you're seeing? Because the Chinese are facing towards Europe and the US, and the Japanese are very active, especially in south east Asia – some sectors are being completely owned by the Japanese.

DW: In our case we're seeing European and Chinese trade buyers.

DB: We are seeing considerably more US trade interest as well.

Farah Buckley: We're certainly seeing that at the smaller mid end as well; a lot more of Asian buyers coming in and being active. And that's across the board in terms of sectors. In the past 18 months perhaps they weren't as strong as before but now you can't count these types of buyers out as a viable exit route.

Richard Sanders: Historically we have found them difficult to manage in terms of process and how they want to participate. But this year we've had a number of successes in the Indian market where they've run a competitive process although only where they've had a European footprint in place.

Lars Eriksson: For us, being pan-European and myself being based in Nordics, the sentiment has been great for IPOs. The Nordic region has had a revival in IPOs. It used to be dry there and also in Germany, but since 2013 we have seen 25-40 each year in the Nordics. In Germany there has been some 30 IPOs – so the sentiment has been great. But for us, buying €20-200m EV companies, we seldomly grow companies into a meaningful size that would, in a normal IPO market, motivate an exit by way of listing.

But, I have seen a few assets that have been on the block over a number of years that ended up being IPOed. The IPO market has been commanding great multiples and I think a few PE firms have monetised on this during the last 24 months.

TW: What we're seeing now though, particularly in Q3, the number of new issues and value are way down – it's 30% down in terms of numbers and probably 90% down in terms of values raised. It's not such a hot market now.

LE: Yes, the volatility is there. We're not an IPO house but rather a trade sale house; that's our speciality. But we have been contemplating, in the last 18 months, IPOs because of the extraordinary multiples that have been achieved, irrespective of the lock up. But now, with the last six months of volatility, we would probably rule it out.

 

AM: How do you see the exit market developing in 2016?

RS: We see reducing evidence that stock market is going to be a viable source of exit. And the continuing wall of money in the PE world is going to dictate secondaries as the lead exit route in the mid-market space.

LE: In every market there's a long list of IPO candidates looking to go public currently. But they are monitoring the market volatility and I would say the number of IPOs will be lower next year compared to 2015.

MG: Secondaries will be more dominant. And one of the points that was raised earlier is that the banks, especially in the northern European countries have been supportive and that's important.

 

Look out for the next instalment of this Roundtable tomorrow, which discusses the outlook for deal financing. unquote" would like to thank MVision, Catalyst Corporate Finance and DLA Piper for making this event possible.

Further reading

• Financing

Private equity leaders share views on financing outlook for 2016

• 07 Jan 2016

• Fundraising

Emergence of "mega LPs" expected to continue in 2016

• 08 Jan 2016

• Performance

Pricing, recruitment top list of challenges for PE in 2016

• 11 Jan 2016

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