Exploring the Factors Behind the Increasing IPO Readiness Period and the Growing Appeal of Private Markets for Investors Seeking Higher Returns.
The average time that private companies take to go public, also known as the "IPO readiness period," has increased significantly since the 2000s. According to data from the consulting firm EY, the average IPO readiness period for US-based companies increased from barely 3 years in 2006 to 9.2 years in 2022. The main factor is that private companies now have easier access to larger amounts of capital from venture capital, private equity, and private credit firms, allowing them to stay private for longer periods of time without the need for costly IPO financing. Additionally, the regulatory burden and cost of being a public company have increased since the 2010s, making it less attractive for companies to go public.
The growth of private markets has been astonishing; for instance, according to data from McKinsey & Co., the total assets under management (AUM) in the private equity industry have increased from $437 billion in 2000 to $6.22 trillion in 2022, representing a CAGR of 12.23 percent. During that same 22-year period, the number of public companies in America decreased from 8,823 to 4,446. There is a clear trend happening.
All of this has led to increased valuations for private companies compared to their public counterparts, which has been a hot topic in recent years. The median EBITDA multiple for private company buyouts was 12.6x in 2022, while the median EBITDA multiple for public companies was 10.2x. This is particularly shown in technology transactions, where the premium paid for private companies is 24.8% higher.
One of the main drivers of this valuation gap is the increasing demand for alternative assets from institutional investors. With interest rates at historic lows during most of the last decade, investors were seeking higher returns and were increasingly turning to private markets to achieve this. This has resulted in a significant increase in the amount of capital flowing into private equity funds, which has in turn driven up prices for private companies. Now that higher interest rates have slowed down the private equity environment, private credit has emerged as the new trend.
As the competition for attractive investment opportunities intensifies with the current macro landscape, it is likely that the valuation gap will continue to widen, presenting both challenges and opportunities for investors.
Written by: Ignacio Paz, CEO & Co-Founder at Sora Capital A.C.
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