Is private equity’s $3tn problem starting to ease?

One thing to start: Rishi Sunak, UK prime minister, is considering introducing new powers to allow ministers to prevent a foreign state from owning a British news organisation. It comes as pressure mounts from within the ruling Conservative party to block the takeover of the Telegraph Media Group by Abu Dhabi-backed RedBird IMI. 

In today’s newsletter: 

• The PE exit logjam hits $3tn

• CVC’s big retail bet in Germany

• Geely faces another IPO test

Private equity’s clogged IPO pipeline

Let’s say you are a private equity investor and you want to sell one of your assets.

Your default choice would typically be to run a “dual track” process exploring a public listing alongside a sale — and then select whichever exit path will maximise your financial return.

However, for the past couple years, the typical process fell by the wayside with the IPO market all but shuttered on both sides of the Atlantic, due to volatility and rising interest rates. 

That has thrown a spanner in the works for private equity and created a tremendous backlog in deal pipelines. Private equity groups globally are now sitting on a record 28,000 unsold companies worth more than $3tn, according to Bain & Co’s annual PE report.

“It’s probably the number one concern in the marketplace right now,” said Hugh MacArthur, chair of Bain’s private equity practice.

While that traffic jam could take years to clear, there is cautious optimism among buyout executives and bankers that rising markets and expected rate cuts have at last put IPOs back on the menu.

Two big PE groups in Europe took the plunge last week with EQT and CVC both announcing planned IPOs for dermatology giant Galderma and beauty retailer Douglas (more on this below), respectively.

In total, Europe’s IPO market is off to its best start since the Covid-19 pandemic, with companies raising $3.2bn since January. That’s more than double the amount over the same period last year, although admittedly that is off a low base.

More listings could be en route to public markets soon if those go well, including the Italian luxury sports shoe brand Golden Goose, which is owned by UK buyout firm Permira.

Perhaps most telling will be the expected IPO for CVC, which has previously gotten close to listing in Amsterdam only to postpone plans, including late last year. 

CVC is reviving its plans again, and a public listing would signal private equity has been fully re-welcomed on to stock markets.

For now, “volatility is low, markets have been fairly buoyant, inflation feels like it’s more in check and people are now fixed on rate cuts for June, and there’s a pretty big backlog”, said Lyle Schwartz, head of Emea equity capital markets for Evercore. “The dials are green.” 

CVC’s beauty bet that turned ugly 

After nearly a decade owning German retailer Douglas, the beginning of the end may finally be in sight for CVC. 

The buyout group, better known for bets on Formula One and watchmaker Breitling, has announced plans to list Douglas on the Frankfurt stock exchange, seeking a €6bn valuation excluding debt, according to people familiar with the discussions.

The eye-catching figure, at a time when exits have been few and far between for private equity firms, belies a more complicated story. The chain has made a profit only twice since the buyout group acquired it and has racked up losses of €1.7bn since 2014, according to company filings.

CVC bought Douglas in 2015 from close rival Advent International, which had taken the company private three years before. Typically, buyout groups such as CVC will seek to own assets for between three and five years before cashing out through a sale to a peer, a strategic buyer or a stock market listing. 

After five years of ownership, CVC still owned Douglas when the pandemic hit. The beauty chain was forced to close during lockdown and was unable to tap German government support due to its private equity ownership. 

CVC was forced to invest €200mn more to prevent its collapse. Things have improved since and the company has won praise for its online and in-store shopping experience. 

Nevertheless, the business is still saddled with more than €3bn of debt. 

And taking the company public doesn’t mean CVC will be receiving its money back any time soon. The private equity group has decided against selling shares in the IPO. 

CVC’s notoriously competitive dealmakers will be hoping they can avoid the fate of some of their peers who have had to resort to buying back companies that struggled after they were taken public.

Geely’s spotty IPO track record 

Fool me once, shame on you; Fool me twice, shame on me. But what about a third time? A fourth? For investors in Lotus Technology, this is not a moot discussion. 

Two weeks after the shares officially began trading on the Nasdaq exchange, they have lost two-thirds of their value. 

The stock’s slide extends an abysmal track record for companies floated by China’s Geely. 

Over the past three years, the group, helmed by Li Shufu, has overseen the IPO of Volvo Cars, and the de-Spac listings of EV brand Polestar and in-car tech group ECARX. All three remain deeply underwater. 

In the Lotus roadshow, executives patiently explained to potential investors that this time would, in fact, be different. They were wrong. 

Public valuations aside, Geely has been a life-giving custodian of out-of-favour nameplates. 

Lotus is a little-known but much-loved English sports car brand, its heritage soaked with motor racing and its cars eccentric and driver-focused. 

Geely’s 2017 bailout of Lotus, when it took a stake in then-owner Proton, was welcome for a business that always drove on the verges of solvency. But its challenge, to modernise the line-up, was daunting. 

A new factory in Wuhan, in central China, has been funded by Geely and will produce up to 150,000 electric SUVs a year by 2028 — a far cry from the traditional petrol Lotus cars that were so manual you had to remove the convertible roof by hand.

The Chinese group, nonetheless, believes it can return to public markets yet again. Last year it filed IPO documents for Zeekr, an entirely new EV brand, on the New York Stock Exchange. 

Daniel Li, chief executive of Geely’s holding company, told an FT summit last year that its idea is to list all of its major businesses, subject to “market conditions”. 

Fifth time lucky? 

Job moves

• Sam Altman will return to the board of OpenAI after a review into the events that led to his ousting from the ChatGPT maker found no evidence that he should have been sacked. OpenAI also announced three more new board members: Sue Desmond-Hellmann, former head of the Bill & Melinda Gates Foundation; Nicole Seligman, former president of Sony Entertainment; and Fidji Simo, chief executive of Instacart.

• European coffee group JDE Peet’s is replacing its two top executives as controlling shareholder JAB Holding seeks a shake-up, turning to former Marks and Spencer chief executive Luc Vandevelde to be chair and interim chief executive.

• Lightspeed Venture Partners has hired Isaac Kim as the venture capital firm plans a foray into technology-focused leveraged buyouts, according to Bloomberg. Kim has been a senior managing director at Elliott Management.

Smart reads

A fatal mistake The Wall Street Journal investigates what happened on a remote Texas ranch in a billionaire shipping scion’s final hours.

Musk’s millions After making billions in tax-deductible donations to his philanthropy, Elon Musk gave away far less than required in some years — and what he did give often supported his own interests, The New York Times reports. 

Bankruptcy fee bonanza Rite Aid advisers raked in millions through bankruptcy. Opioid victims are braced for nothing, Bloomberg writes.

News round-up

Smith & Nephew seeks pay premium for US executives over those in UK (FT) 

Thomson Reuters has $8bn war chest for AI-focused deals, says chief (FT)

Elliott abandons effort to buy UK electronics retailer Currys (FT)

Saudi Aramco increases dividend to nearly $100bn despite oil price falls (FT)

Staff in EY’s deals unit hit out at bosses after job cuts and sales slump (FT)

Kering and EssilorLuxottica among suitors for eyewear maker Marcolin (FT)

Israeli cyber start-up in talks to raise funds valuing it at over $10bn (FT)

EQT to create $35bn integrated gas group with deal for pipeline business (FT) 

Klarna’s reclusive co-founder buys up shares using opaque structure (FT)

Hedge funds threaten to pull India investments due to regulatory crackdown (FT)

Reddit aims to raise more than $500mn in IPO (FT)

Telegram hits 900mn users as founder considers IPO  (FT)