Bridgepoint has taken the unusual step to plan an IPO – how does private equity go public?
All eyes turned to Bridgepoint this month, after the private equity firm took the unusual step to plan an IPO on the London Stock Exchange. With over £23bn under management, the company hopes to raise over £300million as part of the initial public listing.
It is the first-time in nearly three decades a UK-based private equity company has decided to go public. Bridgepoint will be the third private equity firm to IPO, joining the ranks of 3i Group and Intermediate Capital Group.
It comes at a time when the private equity sector is under heavy scrutiny over a series of high-profile mergers and takeovers involving private equity firms. Both international and domestic private equity firms have been criticised over claims the big players are taking advantage of firms in distress as a result of the crushing influence of the pandemic.
The advantages of IPOs are plentiful, and yet most private equity firms avoid them. The first, most obvious benefit is the injection of fresh equity capital following the initial listing. The funds raised from the initial IPO can be used for anything from the expansion into new markets, to covering debt, funding capital expenditure or investing in new technology. As is the case with Bridgepoint, the money raised can run into the hundreds of millions of pounds.
An IPO offers liquidity for existing stakeholders, ensuring investors can quickly exit their positions. This can be an attractive option for those stakeholders who have had their equity effectively locked in a company with no clear exit options. Importantly, the company can also raise capital through subsequent offerings on the stock exchange, instead of private funding rounds – a point particularly relevant for private equity firms.
As with anything, there are risks to an IPO. Initial shareholders lose their proportion of control. The company is subject to intense public scrutiny when it comes to leadership changes, the public reporting of earnings and other prominent company announcements which could affect market sentiment.
But there is a broader theoretical point preventing a rush of private equity firms from going public.
Private equity is by its very nature an illiquid, long-term asset class. Exposing private equity to a highly liquid stock market that is subject to volatile price movements could present long-term challenges. There is also the issue of the stock price: given private equity firms host a portfolio of individual companies which are in some cases are non-sector specific, it is difficult for a stock price to accurately reflect the current and future value of the portfolio of these businesses.
Perhaps the answer is in the term. Private equity is in many ways an attractive investment vehicle because it is just that: private. It pools capital from a network of investors in order to buy equity of companies. Successful firms have deep funding lines and a team of experts who can identify businesses with high growth potential. In essence, it is a successful model that facilitates growth for the private equity firms. Going public has not typically featured in their life cycles as it is not necessarily warranted.
Commentators will follow Bridgepoint’s IPO with a keen interest to see how the market reacts. An estimated valuation has gone as high as £2.9bn. As Deliveroo recently highlighted, public listings do not always go to plan and I anticipate an initial consolidation period once the initial offering takes place. In the short term, at least, there is unlikely to be a cascade of private equity firms clamoring to go public.
For retail investors, the IPO is good news: it opens up the possibility to become involved in private equity by buying shares. The exclusivity of private equity has made accessing the sector difficult for retail investors. Having the option to invest in an industry that enables private sector growth is an attractive opportunity and could challenge the negative narrative that is currently being perpetuated in the press.
Until then, it is very much a case of grabbing the popcorn and waiting to see how the IPO unfolds.