Getting ready to go public

How private equity (PE) investors can help

Initial stock offerings are skyrocketing, heightening pressure on private companies to prepare to go public. The to-do list is long, covering management to financial systems to future performance projections. Many organizations don’t realize that private equity (PE) investors can be a valuable resource.

The IPO window is open

The floodgates have opened for late-stage growth companies backed by venture capital (VC) to finally go public. Although the initial months of COVID-19 caused volatility and uncertainty in the markets, initial public offerings (IPOs) took off in the second half of 2020. The full-year tallies were remarkable: 102 traditional IPOs raised $222 billion, and on top of that, 250 special-purpose acquisition companies (SPACs) raised $75 billion. The total value of VC exits reached a record $290.1 billion, topping the record levels achieved in 2019.

This surge in liquidity has helped provide greater validation around the growing involvement of private equity (PE) investors in later-stage growth equity. Expansion-stage companies that had stayed private for years and reached unprecedented valuations, enabled in part by PE investment, became the year’s biggest IPOs. Airbnb, for example, after taking $1 billion in debt and equity funding earlier in the year from PE investors, became the biggest IPO of 2020 with its share sale in December that valued the company at $47 billion. PE firms’ growth equity investments reached $62.5 billion in 2020, an all-time high, even as the overall value of PE dealmaking declined versus 2019.

All of which bodes well for the VC industry in 2021—and suggests further convergence with PE funds. As exits put money back in limited partners’ pockets and demonstrate the potential for strong returns, investment is likely to flow back into VC funds and the segments of the PE industry focused on growth companies. What’s more, with markets having surged in the second half of 2020, supported by the Federal Reserve and fiscal stimulus, PE investors face a very competitive market for mature companies. This has prompted them to look elsewhere for attractive deals, especially in the technology sector, including the private market for later-stage VC-backed firms.

Being ready to go public

Against the backdrop of strong IPO activity, there is urgency for growth-oriented enterprises to be sure they are properly prepared for going public. The unprecedented number of SPACs shopping for deals—five times as many raised money last year than any prior year1—also increases the likelihood that public ownership could come sooner than expected and before an organization may be ready. SPACs have a limited shelf life (for most, a two-year clock ticking to get a deal done), and additionally, VC and PE investors may be anxious to monetize while the IPO window seems to be wide open, thus accelerating exits.

Deloitte sees five focus areas that will likely go a long way toward ensuring that a company is preparing adequately for public ownership. In each area, we highlight the ways in which PE investors and their representatives on the board can be a valuable resource.

1 Q4 2020 PitchBook-NVCA Venture Monitor.

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Go public with the power of PE investors

When an innovative startup has been shepherded by VC investors from early ideation to market success, putting it on the cusp of public ownership, it’s tempting to see the company’s story as written solely by the founders and the VC team. But think of the PE investors as an experienced editor or coauthor, bringing additional perspective to the tale. A late-stage PE investor can shape the business and give its board more depth and help the company to be a success story.

At a time when the IPO market is booming and SPACs are pushing companies quickly toward public ownership, it becomes vital to tap all available resources to help prepare. Bringing this entire team to the table—founders, VCs, and PE investors—will likely produce the best outcome, getting the company ready for a public market debut that goes smoothly and creates value for all involved.

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