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For more than a decade, the stock market has been shrinking, thanks to share buybacks, leveraged buyouts, cash-based M&A and bankruptcies. That's all changed recently with the massive supply of IPOs — both of traditional companies as well as SPACs.
Patrick Healy, CEO of private equity firm Hellman & Friedman, discusses whether this environment signals a sustainable shift away from privatization toward the public markets.
(The below has been edited for length and clarity.)
Leslie Picker: This pendulum seems to have swung toward the expansion of the equity markets this year. Do you think that's a durable trend or will it swing back the other way, kind of toward this privatization that we've been seeing for the last decade or so?
Patrick Healy: It's been very, very active and I think the backdrop to that is a combination of the good old-fashioned supply and demand. The last 10 years have seen sort of a de-equitization of the public markets and as the private markets have institutionalized, they've been able to not only form companies, and hold them longer in the private markets, but also own companies longer in the private markets. And I think what you're seeing right now, is a lot of that supply coming back into the market in the form of new companies that have been around for maybe a decade or less, and older companies as well. And so, you know, why are companies going from the private markets back into the public markets? I think it's a function of the demand. Investors are very anxious to get exposure to companies that are growing. And I think that's the orientation towards growth. And I think that's really been a big backdrop to the to the IPO markets. One of the other inputs to the IPO markets is a backdrop of volatility. And volatility remains, you know, reasonably low so it's a favorable backdrop. You've got a lot of interesting companies, particularly the technology or the growth oriented, and they're meeting sort of that demand of investors, you know, hunting for yield. So right now, it's a very favorable time for the private markets to, some, transition back into the public markets.
Picker: But does it stay that way? And the reason I asked this is because you're in the business of privatizing public companies, perhaps. I mean, obviously, you could use sponsor-to-sponsor deals as well. But you just raised a $24 billion fund — I mean, that is a lot of capital to put to work. So do you think that the backdrop and the contours of this market that are so favorable to companies going public, and to increasing the share supply in U.S. equity markets, is that sustainable? Or do you think that ultimately, this kind of privatization trend that we've been seeing for so long is going to take effect again?
Healy: I think right now, with the backdrop of interest rates, as we discussed in the hunt for yield, I think there's a very favorable market opportunity for the public markets, and I think the question, Leslie, that rests probably with a lot of investors is what's going to change that? And some of the things that would change that would be the fundamentals. We're starting to see corporate earnings come in right now meeting or exceeding targets, you know, whether that's sustainable in the long term as we come out of the Covid situation, we don't know. That's one aspect. The other aspect, of course, is the specter of inflation. So those might be two variables which would change the appetite and the risk appetite and the valuation levels for the public markets. On the private markets, look, our world has always been competitive. I've been in the industry for 27 years. And businesses today really of any scale, whether they're small or big, are often put through an auction process. And today, a company evaluating what it might want to do, it has the public markets to look at — and that could be a traditional listing, it could be a SPAC, it could be a corporate sale — or it could be an engagement with somebody in the private capital markets and wisely might choose to do something in the private capital markets, I think primarily rests around what type of partner they want. And I think the private markets often offer expertise in sort of a real sort of a way with that partner nature with a lot of flexibility to allow companies to perhaps, you know, grow fast or perhaps pursue strategic acquisitions. So, you know, some of the reasons somebody might look at the private market as an alternative for their business, you know, might be just that.
Picker: A lot has been made of the fact that you've got these companies that are going to the public markets in maybe an earlier stage than they otherwise would have, largely through SPAC acquisitions, a lot of pre-revenue EV companies, certain types of tech companies with minimal revenue at this point in time, companies you would normally see go public through an IPO. Do you think that is overall a good thing for the public markets? You think ultimately, that might provide some opportunity for you down the road as private equity investors?
Healy: I think for highly educated, institutional, professional investors, I think those investors have the opportunity and understanding and the background and the experience to look at the opportunity sets that are coming through the SPAC markets and analyze them. I think it's a less advantageous opportunity set for the retail investor and so I think that's probably what Washington is going to look at. There's a lot of pre-revenue or early stage companies that are able to get public and I think that's driven by the liquidity and availability to fund those companies in their development, which historically will be done in the private markets. That's probably a less sustainable aspect of the public markets and as more and more things get public, investors will get more picky and choosy, and it'll probably orient towards the higher quality, let's say, either in terms of business performance, or there's going to be a valuation impact for accessing the public markets for less mature, less developed companies.
Picker: We talked about the $24 billion that you just raised. Is it a good time to be a buyer right now? Is there enough supply out there, when you've got this SPAC competition? You've got competition from strategics, you've got competition from some of your peers in the private equity world who also, by the way, have raised massive funds in the last few years. Is it possible to deploy that money? What gives you confidence that you can do so?
Healy: I think one of the things that a strong market environment like this offers is lots of companies are interested in monetizing, and that might be valuation levels, that might be an expectation that tax rates might change. So there's a lot of activity actually in the markets right now. Lots of these businesses are typically not available to partner with, or to buy, or to sell so it's a great opportunity for us to find very high quality businesses where we can choose how long we want to be invested in. Even though valuations might move up and down, one of the interesting things about the private markets, in particular private equity, is you have the ability to hold businesses for a long time, develop them, extend duration, so you're not a forced seller at any one time.
Picker: Traditionally, private equity has been a forced seller with your traditional tenure funds. You think that's changing, that the duration expectations between private equity firms and LPs is that you can hold assets for longer just given where valuations are right now?
Healy: I think you'd have a couple things going on to facilitate extending duration. One is we're probably in the third or fourth inning of the institutionalization of private markets, as private markets have performed, as more capital has come in but we're able to own and hold our companies longer. And no longer do we necessarily need to sell something in five years, or write on the timeline, because we have the ability to return capital to our investors through dividends, perhaps a stake sale. So the development of the private markets, and its flexibility and creativity that comes along in the private markets, you know, is a really powerful opportunity.
— Ritika Shah, producer at CNBC, contributed to this article.
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