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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Parents know the golden rule for throwing a great birthday party: every child must leave with a balloon. That way, as one party organiser explains, “everyone leaves not only happy but impressed, so that your child is the talk of the playground for the right reasons on Monday morning”.
Last week European private equity group CVC Capital celebrated a fun fiesta in the capital markets, with balloons and everything.
CVC’s up-to-€2.3bn Amsterdam IPO drew huge investor interest, enabling several shareholders — including Singapore’s GIC, the Kuwait Investment Authority, and the Hong Kong Market Authority — to reap big gains. And despite overwhelming demand, CVC opted to price its offering conservatively — at the €14 midpoint of the indicated range — to ensure a positive after-market. In short, CVC is the talk and toast of trading floors and conference rooms for all the right reasons this Monday morning.
It’s fashionable (arguably too fashionable) to disparage flotations of private equity-controlled companies, but the flotations of the firms themselves have often proved lucrative. In Europe, EQT’s shares trade around 340 per cent above the Stockholm IPO price from 2019, while Bridgepoint stock rocketed on its London debut in the sizzling summer of 2021 and stayed above its offer price for eight months.
Whenever a deal goes wrong, it’s important to critically dissect the execution and identify the mis-steps. But here’s a deal that has so far been a clamorous success for the selling shareholders, for new investors and for CVC itself. It’s therefore only appropriate to review why this listing developed into a “win-win-win situation.”
Instant histories have a way of embarrassing chroniclers, but here are three tentative explanations for the deal’s success: quality and size of the company; alignment of interests; and the tactical decision to prioritise offer size over price. And if these explanations hold any water, it means that this success might unfortunately be hard to replicate consistently.
First, investors want to buy the best stuff at times of uncertainty, not rummage through marked-down aisles of second-hand merchandise for a cheap bargain. And they crave the liquidity that a larger company and larger float provide, because it means they can manage the risk of their position much more nimbly.
CVC fits the bill: it is regarded as a thoroughbred asset manager with a strong record, and a €2bn-plus free float on a circa €15bn market cap affords investors the liquidity to enter and exit in size.
Second, the interests of the different parties were aligned. CVC had aborted two previous listing attempts, meaning the stakes were higher for a successful launch this time around. Also, current employees, who own around three-quarters of the firm, weren’t selling shares in the IPO; investor goodwill could help them monetise their stakes later, as lockups on share sales expire.
A strong after-market might also enable CVC to use listed shares as acquisition currency, just as EQT had done in buying Barings Private Equity Asia in 2022. Meanwhile, the selling shareholders were already sitting on large profits, while Blue Owl, which had bought 8 per cent of CVC in 2021, committed to buy another 10 per cent in the IPO.
In other words, nobody had an interest in pushing too hard on price. As a result, the offering was priced at a fat discount to its peers, estimated to be at around 13 times estimated 2025 price-to-earnings versus EQT’s nearly 18 times.
The IPO wasn’t underpriced because of bamboozling by the underwriting banks either. CVC and the sovereign wealth fund sellers are smart, sophisticated and savvy about financial markets. Rather, they made a conscious decision to price it attractively because it suited their interests. They knew exactly what they were doing.
This attitude shows how a successful business creates a virtuous cycle that eases IPO execution enormously. Not only is the company a more attractive investment proposition to market to investors, but there’s already enough profit to keep everyone happy and align otherwise disparate interests. It’s a far cry from trying to jam out shares in a so-so portfolio company at an elevated price to reach some minimum return threshold.
And this leads to the final point about tactics. It was apparent from the so-called “early look” and “pilot-fishing” meetings that the CVC IPO was going to be a blowout. Investors were already indicating demand well before the offer had officially started. Indeed, the underwriters announced within minutes of launch that the book was covered at the top of the €13-15 range. CVC could have easily priced the IPO at €15 (or higher) without sacrificing investor quality.
But the decision was made on the last day of bookbuilding to increase the deal size by €500mn and tell investors the offer would price only at €14 per share. The guidance to the market was a tactical masterstroke: it caught fund managers by surprise — in a good way, because it signalled both strength and restraint.
One can only imagine how many calls, emails, and texts CVC partners must have received from long-forgotten acquaintances begging for an allocation. CVC shares became the capital markets equivalent of Taylor Swift concert tickets. According to media reports, CVC gave zero allocation to 20 per cent of investors in the order book due to overwhelming levels of oversubscription.
Maybe the best parties are the ones that don’t have enough room for everyone. Just please don’t try that for a child’s birthday party.
