No wonder Victoria’s Secret owner L Brands Inc. prefers public markets to a sale. Initial public offerings are at an all time high in yea- to-date deal value, according to Refintiv. Investors valued newly public companies at over $140 billion in the first five months of the year through today, topping highs of the dotcom bubble. Even in the same period in 2000, 667 firms went public compared to 670 so far this year. That froth could keep a public market exit a viable path for carveouts and private equity exits alike.
For sponsors, the trend is likely already baked in. Take the Victoria’s Secret example. L Brands inked a deal in February 2020 to sell the carveout for $1.1 billion to Sycamore Partners, only to see it scuppered by the pandemic. The most recent sale process reportedly yielded bids above $3 billion. That figure was far enough from the company’s reported expectations of a $5 billion to $7 billion valuation in a public float to warrant pursuit of equity capital markets.
Conglomerates looking to rationalize their portfolios could also take notice, in what could be a blow to financial sponsor acquirers. Strategic owners already voiced concerns about hitting valuation expectations for divestitures in a recent survey. Carveouts are not meeting companies’ pricing thresholds when put up for sale, and even when sold, do not cause the remaining company to re-rate at a higher valuation, executives told BDO’s Spring Private Capital Pulse survey.
Also troubling for private equity are signs of increasing competition from peers for acquisitions. With public markets receptive to divestiture candidates, auctions might heat up even more.
While the data show robust new issuance, it’s unclear how long the trend will last. Fears of inflation, and of the interest rate hikes that could accompany it, have sent markets tumbling in the past week. But for now, financial sponsors can notch solid returns on public market exits. And rue the additional competition such exits provide in upcoming auctions.
