Is there a way a PE firm can profit on an LBO outside of what they gain by selling shares in an IPO?
I am looking at a company that will potentially go public in the next year, and it sure seems like they paid a higher entry price a few years ago than what they will supposedly be pricing shares at coming up.
There has to be something I am missing, right? The company is doing well and the market is hot, so why would they price below what they entered at?
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Well sponsors typically take a management fee as well, but thats usually not a material amount compared to the investment itself.
They can take dividends/special dividends/distributions along the life of the investment.
In addition, you're assuming they are doing a block sale which is cashing out 100% of their interests... ie. not issue new stock. For example, if they paid $50/share for 1M shares, they paid 50M to get into the investment. If they are issuing an additional 1M shares (making total ShO 2M) at $40, its they're not losing money on the investment, since they still hold 50% of the company and the proceeds of the IPO will be used to cash-out some of the sponsor's shares. With the above example, the implied equity value after IPO is: $80M, so sponsor received the IPO proceeds of $40M and still holds 50% of the company.
IPO
Exit via M&A
dividends / special dividends
recapitalizing company (relates to dividends)
This particular PE firm bought 100% of the company for, say $2bn, and now with all diluted shares considered and the rumored IPO price, the company will be valued at approx. $1.8bn. However, they are issuing about 15mn new shares, are selling a portion of their shares, and will retain control of about 80% of the company post-IPO.
Why would they take it public now? Are they assuming that the stock price will go up over the next year, and want the opportunity to choose their exit point?
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