Private equity takes the shine off public markets

Going public isn’t what it used to be. Instead of raising capital in public markets, more and more companies across the globe are turning to cashed-up private capital funds hungrily searching for new businesses to investment in, EY research suggests.

Fast-growing technology companies with attractive business models are among those finding that private capital is proving fairly easy to score and that they can avoid the hefty costs, regulations, and risks associated with a stock exchange listing.

“There’s definitely a lot of investment by private-equity funds at the moment, and I can’t see that stopping any time soon,” said Paul Comley, ACMA, CGMA, London-based finance director at online insurance company Simply Business. In 2017, US private-equity firm Aquiline Capital Partners sold the company to US insurance giant Travelers.

Over the past 20 years, the number of publicly listed companies decreased by nearly half in the US, according to the EY report. Public listings have dropped 62% in South Africa, 61% in France, and 36% in the UK.

Mergers and acquisitions, leveraged buyouts, and startups staying private longer contributed to the decline, according to EY. Also, private equity stepped in when traditional banks reduced lending in the past decade.

Meanwhile, private-equity funds have rocketed and now manage $3.4 trillion globally, up from under $500 billion in 2000, according to the EY report. Increasingly nimble and innovative private capital firms are now looking to invest in a broad range of companies throughout their life cycles and offer a wealth of valuable experience, resources, and network access alongside funding.

Lacklustre post-initial public offering (IPO) performances of Uber and Lyft and nagging worries about further market volatility are also doing little to encourage new listings.

Venture capital (VC) has proved a successful option for Dublin-based e-commerce firm ChannelSight, said Kunwar Chadha, FCMA, CGMA, the firm’s CFO. Venture capital allowed ChannelSight to raise financing while tapping into the wealth of knowledge and experience provided by its investors that can help drive the company forward.  

“People generally think that you’re only looking for money. … It’s more than that in a company like ours. We’re looking for partnership, we’re looking for VCs that have a good understanding of and network within the business we’re in,” Chadha said.

“Once we have visibility of profitability and we know we can sustain an IPO and listing, then maybe it’s an exit, but we’re not looking for an IPO exit at this time.”

Aside from diluting existing shareholders’ stakes, IPOs are pricey, and public companies are more regulated.

Given the scramble for investment opportunities, markets outside of the US and Europe offer significant growth potential for private capital, according to the EY report. Emerging markets accounted for 23% of private-equity activity, up from 9% a decade ago.

In the Middle East, investors’ limited awareness of tech companies’ fundamentals means listing on the stock market is not a traditional route for startups, said Kate Cully, the CFO of the Middle East Internet Group.

Instead, investment generally comes from a range of local private equity, venture capital, and family offices, said Cully, whose company helps fund, start, and incubate tech companies.

“There has yet to be a listing of a loss-making tech company in the Middle East,” said Cully, who is based in Dubai. “Investors, even private-equity investors, are more conservative in their outlook; they can be wary of putting their money into a business that has never made a profit.”

That said, the market is changing fast, and the region is rapidly adopting apps such as Uber and Deliveroo from the US and Europe, as well as home-grown alternatives such as the ride-hailing app Careem and the food-ordering app Talabat.

The recent acquisitions of Careem by Uber and e-commerce company Souq.com by Amazon are helping lay the ground for future deals, she added.

Aside from the additional costs and regulatory hurdles, a stock exchange listing can bring extra publicity, brand awareness, and the potential to raise more money than would be available through private equity. But for many new generation tech companies, the private capital route is increasingly attractive.

“If you have a strong product … there’s so much money around,” said ChannelSight’s Chadha.

— Sophie Hares is a freelance writer based in Mexico. To comment on this article or to suggest an idea for another article, contact Sabine Vollmer, an FM magazine senior editor, at Sabine.Vollmer@aicpa-cima.com.