Thoughts Diary #01 Surprise - or not - Heliad Equity Partners

Thoughts diary #01

Surprise - or not

War, inflation, interest rate hikes – it is a toxic mix that potential IPOs have been battling with for the past year. At the same time, many investors are still reeling from the disillusionment of IPO valuations that collapsed with the end of the Covid boom. And yet, there are growing signs that we could see new issues arise much sooner than is generally expected.

United Internet, for example, plans to list its subsidiary Ionos in Frankfurt on February 8. Two points are particularly noteworthy: Firstly, it is – one might almost say “of all things” – a technology company which is likely to be much more of an icebreaker for the tech sector than another old-economy IPO such as that of Porsche. On the other hand, investors’ appetite for companies in this segment seems to be unbroken: Just a few hours after the start of the subscription period, the Ionos IPO was fully subscribed.

At the same time, the local start-up and scale-up scene is preparing for an opening window for IPOs. The latest example is the rebranding of one of Germany’s most valuable growth companies: In January, Personio changed its legal form from a GmbH to a Societas Europaea, the European equivalent of an AG (stock corporation).

The rapid return of IPOs may seem surprising given that many venture and growth capital funds have raised large amounts of capital over the past year and a half. So-called dry powder (uninvested capital) has climbed to record levels.

Number of Tech-IPOs by region

*Status: November 22, 2022
Source: S&P Capital IQ Platform

However, it is likely that a significant portion of these funds will not flow into the market. The reason is that large investors such as pension funds and insurance companies have clear guidelines regarding their capital allocation. They run the risk of having too much venture capital in their overall portfolios following the recent difficult period for equities. It is unlikely that any fund manager will be able or willing to resist the urgent request from these multi-billion dollar investors not to call up all of their committed funds.

That, in turn, should mean that the highly valued scale-ups – Personio, for example, recently raised capital at a valuation of $8.5 billion – will go public again much quicker. Simply because venture capital funds can no longer finance the sheer number of billion-dollar companies (around 1,200 worldwide). Moreover, in the future, extensive review and negotiation processes will probably once again be the order of the day in the private market as well. The arguments of less complexity and greater speed compared to an IPO will therefore lose weight.

An IPO would be anything but a stopgap solution. Once the exaggerations from 2021 have been (painfully) corrected, tech IPOs once again offer great opportunities for all parties involved: investors get an exit channel, companies gain access to (growth) capital, and investors get the chance to participate in tomorrow’s champions. The rapid return of tech IPOs would therefore be far less surprising than widely assumed.