PE Firms Hoping to Cash Out in IPOs Mull Creative Debt Fixes

(Bloomberg) — Buyout firms are planning to cash out from a string of European portfolio companies in 2025 to return money to clients. There’s just one catch — stock market investors don’t want the debt piles that can come with them.

That’s leading private equity groups to explore ways to clean up these balance sheets, including shouldering part of the burden themselves. One option is to lump debt onto a corporate structure outside the entity being listed, reducing the amount of equity the IPO needs to raise to bring down debt exposure, bankers say.

It’s the sort of financial engineering more commonly used for private companies and has few recent precedents for firms being taken to European stock markets. Yet with pressure mounting on private equity to exit investments, a pre-IPO funding round or moving some debt to shareholders could clear the way for listings, according to Alex Watkins, co-head of international equity capital markets at JPMorgan Chase & Co. 

“One of the key issues that was delaying private equity IPOs is leverage — sponsors are now either getting on with IPOs, even if that means deals with large primary components, or exploring other solutions,” said Watkins. 

Europe’s IPO market is starting to bounce back, and bankers expect even more next year, with much of the supply likely to come from private equity firms shedding assets after a tough couple of years. Because many of these investments were funded through leveraged buyouts during the easy-money era, debt piles are now in focus in a world of higher borrowing costs. 

Buyout groups are increasingly turning to the stock market to exit their investments, with more than $25 billion raised in Europe alone this year through IPOs and selldowns led by private equity funds and similar investors. 

Market practice indicates that most businesses need to keep debt at no higher than three times core earnings in order to go public. Selling new shares through the listing can raise cash for deleveraging, but leaning heavily on such an approach comes with risks. 

If the amount required is too large, it leaves owners with little room to tweak the offer size and therefore less pricing power, according to Andreas Bernstorff, head of ECM at BNP Paribas SA.

That’s prompting private equity groups to think more creatively about the ratio between debt and core earnings, a commonly used measure of leverage. One potential solution is payment-in-kind debt, which gives sponsors more options around deferring coupon payments.

“An option being considered in IPOs next year is raising PIK debt at a holding company level and pushing equity down to the company that’s going to list — that way the sponsor is responsible for servicing the debt,” said Bernstorff. “It’s not that dissimilar from a margin loan, but I think IPO investors are becoming more comfortable with that structure.”

Such a solution does create another risk: private equity shareholders could be under pressure after the IPO if the dividends paid by the company aren’t enough to service the debt, and may need to sell shares instead. These challenges mean that while firms are considering the options, that doesn’t mean they will execute them.

Financial Discipline

Some firms have already taken a proactive approach. Last year, Swiss skincare giant Galderma Group AG, backed by EQT AB, raised $1 billion of capital in a private round ahead of its IPO. The move proved to be a success, with the stock rising around 70% from its listing in March.

Given the sheer size of the portfolio companies looking to go public in Europe next year, there will likely be “some large primary raises at IPO, or pre-IPO solutions like Galderma’s,” said Manuel Esteve, who leads UBS Group AG’s ECM business in the region.

For credit investors, these IPO ambitions are proving a welcome development.

“An IPO is often viewed as a credit-positive event by credit investors, as it allows a company to access additional capital without relying on the debt market and potentially use the proceeds to reduce leverage,” said Raphael Thuin, head of capital market strategies at Tikehau Capital SCA. “It can also enhance transparency and financial disclosure.”

(Updates with deal volume in sixth paragraph. Earlier version corrected title for Watkins in third paragraph.)

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