KKR is one of the world’s largest private equity firms, and also one of the most active private equity sponsors of IPOs, with 3-4 IPOs per year globally. In Europe, they have listed 6 companies over the last 5 years: Trainline, Calisen, Hensoldt, SoftwareOne, Darktrace, and OVHCloud. Eric Han is a Principal within KKR’s Capital Markets team in New York, and has managed all these IPOs from KKR’s side.
He shares with us how KKR approaches their IPOs globally, including IPO readiness, listing location, structuring, and post-IPO liquidity events.
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Transcript
Per: Today we will talk with Eric Hahn, a principal at KKR, one of the world’s largest private equity investors. Eric’s role is to manage the IPO processes for KKR’S funds. KKR is one of the most active IPO sponsors globally, averaging three to four IPOs per year and Eric has been at the center of all the IPOs that they have executed in Europe over the last years, including companies such as Trainline, HENSOLDT, and OVHcloud. In Europe, more than 40% of IPOs come out of private equity or venture capital funds.
One of the criticisms we often hear from our peers in the investment community is private equity is selling – why should I be buying? Today, we’ll try to get Eric’s perspective on this question as considerations around listing a company in Europe versus the US and how to ensure companies are ready to become public.
Before we start, we would like to remind our listeners that our discussion is not financial advice nor an investment accommodation, nor a solicitation to buy or sell any financial instruments or an offer for financial services, or any order of the transaction. The information contained in the recording has no contractual value and are destined for an informational purpose only. Amundsen Investment Management and the participants in this podcast may have holdings in the companies being discussed.
Gautier: Thank you very much, Eric, for joining us on the show today. It’s great to have you. We’ve been talking to each other for a while now on different transaction in the past and you accepted very kindly to do this podcast with me today. Maybe can you start with an introduction of yourself would be great.
Eric: Yes. Happy to. I’ve been now with KKR for five years. I sit on the public equity team within KKR capital markets, so think of us as the in-house capital markets advisor to all of our deal teams and portfolio companies. I focused exclusively on the public equity side of things, so think managing the IPO process, the subsequent monetizations, pre-IPO raises that our portfolio companies do as well as anything equity-linked, so think convertibles, margin loans, derivatives, et cetera. I also lead all of our investor-facing activities as well as everything related to the European portfolio.
I’ve been involved with all six IPOs that we’ve taken public in the last five years. Think Trainline, HENSOLDT, Calisen, SoftwareONE OVHcloud, and Darktrace, and then prior to that started my career at Citi also working in an ECM capacity.
Gautier: As a firm, you’re very global, obviously. Everyone knows about KKR, big firm, very large in private equity. Can you tell us just some numbers in terms of how many divestments you do per year in private equity just to get a sense of how active you actually are as well in IPOs?
Eric: Yes. I can give you some statistics around how frequently we tap the public markets that’s helpful. The funny fact there is if you look over the last decade, we’re the most active sponsor when it comes to exiting via the public markets. The IPO process is truly built into our DNA, but if you think about just some context, excluding last year and this year, of course, which are fairly anomalies, 2021 was a peak for us. We took 11 of our portfolio companies globally public that year. Prior to that, if you think about it on a 5 to 10-year basis, we average roughly three to four IPOs a year.
Gautier: Three to four per year. That’s been an average for you. This level of activity, is that mainly in the US, Europe, or again, it’s very well balanced across the different geographies?
Eric: I would say if you look at the history of the firm, I think the majority of that is going to be in the US, but again, I think it’s come in waves. For example, in the 2018 to call it 2021 era, there was a fair slowdown in the US portfolio so I felt like we were spending all of our time in Europe. That’s when we did Calisen, Trainline, SoftwareONE, and HENSOLDT. Those are all back to back to back to back.
Gautier: For sure IPOs may be the minority of few exits. Most likely you would do trade sell or financial exit, right? Secondary buyers?
Eric: That’s right. For the most part, you will see sales strategics, other sponsors, but I think the interesting thing is at least in most of the ICs that I’ve sat in, oftentimes because of the way we invest, which is quality bias and oftentimes with a tilt towards growth, so assets that will and should be liked by the public markets, you have, as an exit base case always an option around IPO. Doesn’t mean we always take that. We’ll evaluate what is the most value-enhancing for our LPs, but at the same time, I think it’s not something we’re afraid of, which I think is not the case necessarily at some other firms.
Gautier: This option you’re talking about listing the business as opposed to a full private exit, how has this option changed over the last years? There’s been a lot of talk about staying private for longer, a lot of capital in the private markets. It’s true that we probably have seen a fewer IPOs. ’21 was an exception obviously, but has the IPO product or option be less appealing for you guys or no change really?
Eric: It’s interesting. We joke that folks probably are less inclined to get involved in the IPO process just given what we saw happen between ’21 and ’22, but the reality is I don’t think it’s actually slowed any of those discussions down. It’s just delayed them. Our pipeline is still fairly active. We’ve got a handful of things that we think are definitively going to come to the market. It’s just a question of timing. I think the partners here understand that this thing comes in cycles. We’re going to have years like last year and this year where the markets are just shut and/or slower for the majority of issuers.
I think the question is just how patient can we be and the answer is we can be quite patient around some of this stuff. I’ve been extremely surprised and it’s been refreshing to see that that view hasn’t changed. No one is shying away from the process. They just understand it’s a timing constraint more than anything else. Time is our friend, honestly. That’s the biggest difference between investing privately versus in the public markets.
Gautier: Maybe it’s difficult to generalize, but when do you think the IPO is actually the best outcome for your portfolio companies? Is that depending on the top of the business, the gross profile, and maturity of the business? What will be the considerations behind the decision for an IPO versus some other routes?
Eric: Look, it’s a great question. I think at the end of the day it really comes down to our fiduciary duties to our LPs. We need to be pretty dialed into what the return profile looks like, strategic sale, or sale to a sponsor versus a public exit. I think where we’ve found the most success with IPO exits is when you’ve got a fairly clear comp where our company is certainly the better of the two. There’s a clear valuation marker out there. We find and get positive investor engagement early, concede the shareholder register with the right partners, execute the IPO well so that it trades wel.
Then that enables us to monetize in a timely fashion. I’ll give you an example though. We had in the US an asset called Nature’s Bounty as a consumer health asset. They do the vitamin supplements. You walk through a Costco, you see all of our products. This was an asset which we ultimately dual-tracked. Had actually flipped the S1 public, but had been doing some work in the background with Nestle. The IPO setup was perfect. There was incredible investor engagement. We had a cornerstone signed up for north of 25% of the deal and so it felt fairly de-risked.
I think demand for this sector has continued to be very strong, but once that thing flipped public, Nestle came back and gave us an offer we couldn’t refuse. The reality was they put a price tag on the business that was pretty much in line with our fully distributed valuation and so as you think about time value of money, getting that upfront as opposed to thinking about it over a two to three-year period. Of course, look, we could make the argument that things could have traded even better than where our fully distributed view was on valuation and you could exit higher, but we’re not fortune tellers.
I think at that point in time, that was the right decision to make and it’s been a great investment for us overall.
Gautier: I can see if you have that opportunity until the end of the process and you have a better offer, obviously, I guess you want to take it. That’s interesting because I guess that raises well the question when you should start working with your companies to be IPO-ready because if you’re doing all that work to be IPO-ready and being a public company has some additional constraint, right? When is [unintelligible 00:08:57] really starting to engage the cost and imposing those constraints on the management because it’s pretty intense process as we know to be IPO-ready?
Eric: It is a very intense process and we never sugarcoat it with our management teams. We are very clear that it’s effectively taking on a second job, but you’ve also got to run the company at the same time and ensure you’re hitting numbers. It’s not a joke and not for the faint of heart. I think our view from the KCM side is as early as possible, candidly, because there are just certain things that folks are not thinking about in a private context. One of the big things that we like to stress is just the readiness side or your financial controls and accounting systems in place and ready to go.
Can you close the book in a timely manner? Can you actually forecast on a quarterly basis? That’s something that I think we see a lot of struggle with sometimes. The other area that we see is just the adjustment in mindset. In a private context, everything we look at is EBITDA. Below the line, not as big of a factor, but when you go public, EPS is super important, and so trying to shift that mindset to thinking about P/E and guiding towards that. Something a lot of CFOs struggle with, particularly if they’ve never been a public market CFO in the past. We tend to think as early as possible, not necessarily to kick off the process formally, but just to start having the dialogue and thinking about it in the right way.
Gautier: Do you see difference between Europe and US in that respect our thinking, for example, capital structure? I think in the US public investors can take a bit more leverage. In Europe probably there’s a bit more conservative with leverage and IPOs tend to come with lower financial leverage. That obviously would impact everything below EBITDA, right? How do you address those differences between Europe and US when you talk to your portfolio companies and how you’re thinking about having those companies ready as well.
Eric: I think there were two questions baked in that which is one, what are the differences we see between the listing locations, and then two, how do we ultimately decide between those two? I think the four things that I see fairly frequently is, one, leverage, which we just talked about, so European investors tend to be fairly conservative relative to the US.
I think the way to think about that is probably a turn more conservative on leverage than in the US. Valuations I think there are typically some disparities as well, particularly in the high-growth sector.
You look at the Nasdaq relative to the LSC or the EuroStocks and that just seems to be a sector that is maybe a little bit more appreciated and or better understood in the US markets. Liquidity for sure, US markets are just more liquid. We’ve IPO-ed so many things in Europe and no matter how much float you push into the system doesn’t seem to change the outcome. We floated 65% of Tradeline billion £1, traded £1 million a day. We floated £250 million of Darktrace, 10% flow traded £1 million pounds a day.
Things just don’t seem to trade much in Europe unfortunately. Then on the research side, I think that’s a pretty big difference in the market. In the US you have research analysts that will get involved in the IPO process, but they don’t publish research until 30 days after the actual IPO. In Europe, you have research analysts that actually have to lead with valuation, lead with a full report that investors can lean onto, and that’s a tougher proposition for some of these analysts because you just have no clue how some of these things will trade post and your price targets may be all out of whack afterwards.
We find that that kind of market exposure aspect in Europe is just a longer process. You’re out there for about a month before you price in the US it’s closer to a couple of weeks.
Gautier: How do you select between US and Europe then. Before everything you said, at the end of the day it seems that US market are more attractive in terms of IPOs. More liquids probably can get better valuation. I think that can be discussed and the process seems a bit smoother as well.
Eric: On paper, I think that’s right but the reality is those things are true on a longer-term basis, but on a case-by-case basis they may not be true. What doesn’t work in that context? You’re a European company that’s purely in Europe or single country within Europe and you want to list in the US, but there’s no brand recognition in that instance in the US. If you’re not a big large global company with global operations where you can actually point to 50% of revenues being in the US, it just doesn’t make a ton of sense.
If we were to list HENSOLDT in the US, it would be an asset that would unfortunately just not command the same type of attention as Boeing or any of these other large defense contractors. I think the other thing you got to take into account is heritage of the business. I think Darktrace was a perfect example where Poppy, the CEO of that company, very proud to be a high-quality British tech pioneer. I think there was a scarcity value associated with being listed on the LSC as opposed to being in the US despite the fact that we have very clear cybersecurity comparables that trade on the Nasdaq.
The other thing to take into account is just your profile. Yes, you may be a quality grower with good margins, but then how do you face and stack up against some of the higher quality cash flow-generating SaaS companies that are in the US? These assets tend to grow faster with better margins, so you want to make sure you have a profile that’ll actually stand up against that. I think if you look at Odeon if they had listed in the US I think they would’ve been very successful as well, but that’s been a huge darling in the European payment system.
It’s because there’s nothing else like it at that scale in Europe. I think you got to really take into account those types of factors. It’s not just a liquidity or valuation or comp discussion. Then I think the last point which folks fail to understand, but very often we’ll get sent pitches for some of our businesses. I’ve seen this happen even on IPOs that we’re not involved in where you’ve got a US business, which from a business perspective is a real comp and people think you can just port over the valuation, take a discount to it and simple done.
That’s how you get to the valuation for this new asset. The reality is in all the IPOs that we’ve worked on, I think that’s been some component of pitch that we’ve heard, and what we found is European investors just will not look outside of the continent. They will defer to things that are in Europe, comp it two things in Europe. You’re not going to get the same valuation uplift that you think theoretically you’ll get. I think OVHcloud, which we took public in ’21 was a great example. DigitalOcean is a very clear comp listed in the US and we could not get any single investor in Europe to really focus on that.
The only guys that really did take a view, there were US investors that ultimately participated in OVH’s IPO, but the French investors, the UK investors really struggled on that point and actually looked at a basket of other tech names, which candidly weren’t really the right business comps because they didn’t have the right financial profile. Broadly speaking, tech versus tech, that’s how they evaluated it.
Gautier: I think that’s very true and we keep seeing it very often. You mentioned OVH, but recently you had the IPO of Ionos in Germany. I think they tried to pitch it with valuation like GoDaddy in the US, but effectively I don’t think it did really work. I think the US investors might participate in European IPOs, but that doesn’t really work the other way around really, and so I think you European investors have their own cost of capital and valuation approach. I think it never really worked to compare a US company with a European company from a variation perspective, but we keep saying it in PTOs as you say.
There’s another big difference, is the liquidity in Europe you mentioned that whatever the deal size, company size, you end up with assembly liquidity, which in a sense can also impact valuation but also will affect for you your timing to exit. For sure it must influence you as well. Again, in your IPO decision, again going to the US for an IPO versus Europe, how long you going to be stuck with this asset? How you address this concern around liquidity?
Eric: It’s a great question. Our view is this, which is liquidity is certainly a problem, but it’s a problem that’s pretty quickly solved with performance. If you have a high-quality company that can go out there and constantly hit numbers, liquidity shouldn’t be a concern for you because there will be a bid on the other end of it. Even if we take a deal out, that is some astronomical number on a day’s trading perspective, if there’s performance on underlying, people will be there to buy the deal. I think that is a function of dealing with that market.
You’re going to have to bite the bullet on liquidity, but you have a high-quality company that does well, not going to be a problem.
Gautier: And out of curiosity, you talk to European investors, your colleagues in the US talk to US investors. Is there a big difference to how many accounts you actually speak to versus your US colleagues in terms of again, the breadth of the market? Structurally we know there’s more liquidity in the US but in terms of investors who engage in IPOs and capital markets, do you see as well a difference?
Eric: In my experience on balance shore there are certainly more investors. I think we have a slightly different take on this, which is we’re not looking to partner with everyone under the sun. We aren’t a bank, and so the goal is to have a number of close partners that we can work with on everything that we trust from a feedback perspective. Yes, we may see more lines in the book at times in the US but the reality is all we’re really focused on are who the top 20 guys are because those are the guys that are going to be partners to us over the long term and really drive the trading performance thereafter.
The opposite is also true. When we took Tradeline public in the UK, that was arguably one of the highest-quality books I had ever seen. So many lines in the book great Cornerstone and Baillie Gifford, every long-only under the sun in the top 20. Again comes down to asset quality more than anything else I would say. Region agnostic, really just quality bias more than anything else.
Gautier: Another thing is in term of private equity, who has a setup that you have, you don’t have many. The KKR obviously you have capital markets. I know a few other big private equity house also have a similar setup internally, but it’s not that very common. I think that’s good because obviously you have a very good view on the product and you making sure you can deliver best execution as well. Over time, for sure it must pay off as well. What does that mean in time of you focus entirely on how to execute those IPOs. Or do you have the best practice or playbook that you actually apply for every IPOs? Do you really focus on specific things, or at the end of the day, every IPOs will be very unique, very different and you’re not applying again, the same recipe across all your exits.
Eric: I think there are a few pieces of that question. I’ll just answer them chronologically. You are right. Our team is relatively unique when it comes to internal capital markets on the sponsor side. Obviously, all of our competitors have internal capital markets teams, but you’re talking about a handful of folks that split their time between debt and equity, of which majority of the time they have mostly a debt background. KKR capital markets is just a different animal. I don’t think people really appreciate the scale and reach we have.
We have 70 folks globally, across four separate business lines. We’ve got debt capital markets, equity capital markets, which is my team, the co-invest side, and structured capital markets. The thought was just given the frequency and scale of participation across our portfolio. If we could bring that expertise in-house, you’d end up getting better execution of our deals, which translate into better returns. Getting the right LBO financings in place, getting the right IPO structures in place, syndicating the right amount of equity to co-investors so that we can expand our buying power.
Then figure out unique innovative ways to structure around some of the new hard asset lines we have across infrastructure and real estate through the structured capital markets platform. We’ve got a full team eight to nine people across just public equities, which I don’t think other teams have. Now in terms of the playbook that we’ll run, you are right, there is a playbook. Everything we do, candidly, is grounded in investor insights. We over-index and all things distribution-related. I spent the last five years trying to build out the best relationships we have, like with folks like yourself.
Where that has really paid off is the feedback that we get, and the real-time nature of that feedback. At the outset of a process, there will be instances where we don’t even have a bank get involved and we’ll take a management team around to meet with our best partners to get some candid views on a, is this an IPO that could work and b, if it is, what does a rough cents on valuation feel like today, based on the things we’ve told you. Oftentimes, this can be a year and a half, two years out from an actual IPO launch.
That is the type of feedback that can then be fed back into our deal teams, where they can then take a view of, do I want to pursue this path and waste all the calories to go down the public route, or is a strategic sale make more sense. Then from there, we can kick off a process where we bring in a bank under the tent to help us with the execution. We work side-by-side with them but we’ll be in all the drafting sessions, put them all together, put the presentation together.
Then over the course of the life of the deal, we are talking to all the investors that are meeting them on an early look basis of PDE basis, a deep dive basis, and then fully allocating the book top to bottom to make sure that we have the right structure. What we found is that oftentimes, that is just yielded better awareness of where the deal is going because there have been instances where if we’re not involved, the deal team feels like they’re in the dark, we’re not getting the right color in place.
Views on valuation change pretty quickly and then we get to pricing and we have no clue why and how we got there, and why the account that pulled us they were super engaged two weeks ago is no longer there for some reason. Having us boots on the ground, I think has just yielded a better one, outcome for most of these deals but two, we just have a better relationship with the buy side, because there’s actual two-way dialogue as opposed to going through an intermediary.
Gautier: Aiming to get a better relationship with the buy side I think it’s very important, especially if, obviously public markets is an important way for you to monetize some of your investment. Is very frequent in our world and when I talk to my fellow public investors, that okay, there’s a private equity selling what should we be buying now? There’s always a bit of skepticism around private equity, timing of the IPOs, why you selling and I guess having the setup you have probably will help as well addressing that when KKR are selling an asset.
How do you think then yourself when you have to price an IPO when you exit post IPO knowing that, again, maybe the market would challenge about the rationale of the listing?
Eric: That’s a great question and I understand why some of your counterparts and or competitors would feel that way about when you see a sponsor-backed IPO. The reality is because we’ve been such a large user of the capital markets, I think we’re probably one of the more sophisticated actors I’m here. We understand that your day-one pricing is not at all indicative of where the outcome of the entire investment is going to be. My sole responsibility on this team is to make sure that deals work, so that we can access the market as a firm as frequently as possible.
I think we’ve have a number of competitors that have unfortunately marred their reputation by being a penny shy on some of these things. The reality is, if we miss price and IPO, no one benefits, investors lose money, we’re stuck in the asset much longer. Actually, if we can give a dollar away day one to ensure that this IPO can trade up 10, 15, 20%, that’s a great outcome because it means we can break the lockup earlier, we can come back to market, we’ve got supporters on the other side willing to take more stock.
It gives us a multiple number of avenues to then monetize down the line if we want to dribble it or do more market follow-ons, et cetera. We found that when we do things correctly, we can get out even faster and have better valuations so Trianline was a great example. Highly successful IPO, I think we broke the record in terms of fastest sponsor monetization of the last decade on that asset. We did a few unnatural things like breaking lockups early but it worked because one, they were based in reverse from investors so we knew there was demand but two, we priced them really well.
Every trade we did, investors made money on that deal. That’s the type of partnership we really seek to emulate across all of our transactions. We’re not going to be perfect, markets will change, but that is the larger overarching goal when we take a company public.
Gautier: This is what I think everyone should be aiming for. What we see unfortunately, an IPO in Europe, at least is too many assets, where you have a pre-IPO owner stuck with the asset, because probably a bit aggressive at the time of the listing in terms of price or size, unfortunately, as we say, liquidity is not very large and deep in Europe, and it doesn’t take much for actually the stock to be relatively dead. We have a few examples, unfortunately, again, from the 2021 cohort, but that means how you’re thinking about the sizing, because again, I think there’s a difference between Europe and US.
We tend to see more primary-driven IPOs in US. In Europe, that’s probably a bit more secondary, that means you have bigger free float bigger offerings relative to the company size. Do you have a view on that how you should actually size because again, you said actually sizing doesn’t really impact your liquidity in the aftermarket? You could argue less paper at IPO be more tension in the book, probably a better start as well, as opposed to maximizing the deal size.
Eric: I think you’re 100% right in that factor. The sizing is not going to impact or liquidity, at least not the first six months post an IPO. What we really solve for is two things. One, we’re solving for the right capital structure so the majority of things we’ve taken public in Europe have actually been primary capital raises. You look at OVHcloud, look at Darktrace, look at HENSOLDT, look at Calisen, all primary raises with maybe a minute part secondary, but you’re talking about less than 10%. The second piece is then solving for tension in the book.
On both OVH and Darktrace, those were sub 15% floats and I think we quickly realized that rather than trying to overfill the market with what is the correct state, I think everyone says you’ve got to float 40% day one, we just don’t subscribe to that mentality because ultimately, you end up in these situations where you’ve just got way too much paper to fill and then you end up with some pretty sloppy trading and no price tension. What we found is, if you can get that tighter price in day one, you’ll get the same type of IPO pop or hopefully that same type of IPO pop that is the US market is a little bit better known for.
When you have real offer like that, I think investors get a lot more excited to participate in this transaction. We’ve really tried to put that in our ethos. We’ve also done the opposite where, again, Trainline we floated 65% of that company, day one, but that was backed by demand, we had a cornerstone, 10 times oversubscribed, every long-only in the book, we had the right to do that and we had the right setup for it. In a tougher tape, like what 2021 was were incredibly crowded market 10 things coming public every other week, you had to be really strategic around how you set that up.
You had to have a very clear line of sight into who was going to be a buyer who’s going to hold and who’s going to add in the aftermarket.
Gautier: You say a lot of very interesting things I’m glad you said them. Another I think interesting question that people I don’t think really understand how allocations are run in an IPO context. You as a shareholder, you get to know some of those investors the management obviously doing the roadshow interact a lot with investors, the banks know them as clients as well. There’s always a question who gets stuck, how much. Do youself, you get involved in the allocations? My impression, to be fair, that usually management doesn’t get involved enough.
Then many investors, they should know who they want to be or have on their register. It seems to me there’s always a bit of unknown or uncertainty around this allocation process. To what extent do you guys really get deep into that process?
Eric: We will be involved on a line-by-line basis on all of our deals. In instances where we are the majority owner of the asset, we probably have a heavier hand in self-selecting who the investors are. In instances where it’s a growth equity investment, for example, and we’re a minority shareholder, it’s truly a partnership with the other shareholders as well as the management team. In all instances, we take input from our management teams. Again, all of that is grounded in having real dialogue.
We will call all of the top 20 investors and have a real discussion about what their view is on the asset, how much they actually want. Because oftentimes you have inflated orders and you have to really diligence how much stock they’ll take, whether or not they’re going to buy more, what their price targets are on a short-term and long-term basis. Then from there we can make the best decision calculus as to who we can trust in the situation. The other part is just having repetition with a lot of these partners. Gautier, we’ve worked together now five plus years.
I think we feel fairly safe when we give you stock and you tell us you want it, that you mean it. That’s not necessarily the case for everyone else. That’s part of why we try to have constant dialogue and interaction around this because we can then quickly see who’s actually going to step up to the plate when they say they will.
Gautier: Interesting. I’d like to move quickly to a topic, actually, we did cover that a bit to some extent, but how you managing your position after a listing? You refer that hopefully deal perform well everyone is happy management happy delivering things go well. To what extent you have some pressure to actually monetize faster investment or not? Maybe, I might be wrong? I know the P industry used to really think about IRRs. Time value of money, and then that has shifted to money on money multiple.
It seems to me that there should be a bit less pressure to actually exit and you’re more thinking about actual return money multiples. Is that true? Has it changed your perception of how long you should stay after the IPO or that’s totally irrelevant?
Eric: I think the overarching theme here is that duration is always our friend on this side of the table. We can be incredibly patient. If we have a long-term view on valuation, we will stick to it. I’ll give you an example. One of our longest-tenured investments was a business called First Data now Fiserv. Big global payments business, but we LBO the asset in 2008. Not a great time to be putting on a big capital structure on a company, but over time, got through it, did a private raise in 2014 to deliver the business and then ultimately took the company public in 2015.
The IPO was a challenge one, ASIC was over-levered and unfortunately, we missed some numbers. We were stuck in it for another two years and then did our first sell-down in 2017. We formally exited the position in November of last year. It was over a decade-long monetization, but it was one where we stuck to our guns and had a view that this asset had real long-term value and we’re happy to be patient around it. Ultimately a bias towards the multiple on money more than the IRR. Now, do we ever have any pressures to monetize?
Certainly, there will be instances where if we have something that’s very liquid, easy to monetize, we’re looking to hit a target and or we’ve been at it for too long and are getting some serious pushback from our LPs, certainly, we will look to try and ease those concerns. The reality is those are far and few between. At the end of the day, we’re going to be fairly disciplined on valuation and timing and really look to optimize that for our LPs.
Gautier: I guess, but there’s also expectation from public investors like us when you bring an asset to the market, that eventually becomes a hundred percent free-float company. That’s a natural route and objective. At the end of the day, those should be very liquid assets, free float, and owned by the public investors. What happened for the last two years, a lot of those IPOs tread well below the IPO price. I guess there’s a bit of a debate right now should you give a bit of liquidity to the market on some of those investments?
Which maybe they have performed, or a company has delivered, but the market has corrected and because of capital has gone up, right? How do you think about that? Does that mean you have to get back to the IPO price before actually giving liquidity to the market or you’re actually considering giving some liquidity? You know it’s actually in the interest of the company as well. Any views on that debate?
Eric: I think there are certainly some merit around giving a little bit of liquidity, but it’s a chicken and the egg problem because from our seats, we understand that there is this liquidity problem with the stock and that that’s probably driving some depression in the multiple and the valuation in the share price. At the same time, we also don’t want there to be a signal to the market that this is a price level that we’re comfortable necessarily exiting at. You run into this problem where it’s almost a circular argument to some degree.
Now I think it’s a case-by-case basis, right? There will be certain instances where I think that does make sense. If you feed a little bit of liquidity in the name, you get the stock back on people’s radars, you ensure that people are beginning to focus on it a little bit more because it was either orphaned or forgotten for some time. That can be a real catalyst event over time. I don’t think that’s necessarily true in every case, but I think truly there are some case-by-case basis where it does make sense.
Because as you say, there are some names where sponsor hasn’t done anything for two plus years and you just sit there, scratch your head and wonder is this ever going to come back or should I stop spending time here at all?
Gautier: That leads me to the other topics here is management, because we see all those companies where management is delivering. What I think I have observed is also an increase in the number of management changes after the IPOS 18 months, 24 months, maybe sometimes even sooner than that. Where basically the management has been working with the sponsors for a couple of years led to the IPO and then changed. I think that’s difficult to accept for public investors. We can understand management want to retire.
My view is why not actually hiring a different type of management just right before the IPO to get this PLC type of management who can stay for longer, right? Again, how do you think about the risk that the management want to quit after the listing? Do you have again, a model for that or is case by case?
Eric: Yes, the reality is it is case by case, but I think we understand that that is a very important piece of the puzzle for the shareholders that we bring into an IPO. Most of the time we have some longer dated contracts with the management teams and or an understanding that they will be there at least for a couple of years post the IPO to ensure that the company continues to perform at the same level. I think the tricky part, Gautier, you mentioned could we just go hire a different management team.
Sometimes we have very high-quality people in place where if we were to bring someone in new right before the IPO, it’s just not going to lead to the best outcome. They’re not as familiar with the company. They may not have the right growth strategy in place. Some of that takes time. It’s not as easy as just, “Oh, we’ll just pluck in someone and prop them over and it’ll be sunshine and rainbows thereafter.” Often times if we make a decision to IPO with a management team that eventually does want to retire at a certain point, we just make sure that it’s a mutual understanding that they will be involved at least for a couple of years thereafter so that there’s real confidence in the market.
What happens thereafter again, it’s hard for us to control because oftentimes we’re not as involved with the company anymore. We may not own shares anymore, but again, at least for the duration of the investment and the near-term number of years thereafter, we try to ensure that the folks are staying in their seats.
Gautier: That involvement past IPOs, you say that, that over time you might not get really involved anymore. That’s related to you having a board seat or specific ownership threshold is, again, deal-by-deal depending on the team and the relationship with management.
Eric: I think it’s less deal-by-deal and more region-by-region. In Europe, there are just more stringent laws around the way we can interact with our management teams once they’re public. I think also the other difference is just the way the capital markets are structured. In the US in order for us to do a trade in the company, the management team has to be under the hood. They have to be involved. They are the ones that are issuing the prospectus off the company’s shelf. They’ve got to do marketing and do meetings for us, when we do a marketed deal.
They have to do a conference call when we do a block trade, it’s just a different level of engagement. We are talking to them a little bit more frequently in those instances, particularly as we think about our monetization cadence. In Europe, it’s completely different. The reality is we’re not allowed to tell the management teams that we’re selling, so you don’t have that same type of coordination. Also, the marketed follow-on methodology is just not something you see almost ever. Everything is a wall cross or a backstop deal into an overnight follow-on.
We do it without management’s knowledge at all. That whole construct just lends to a fairly different type of day-to-day dialogue. That doesn’t mean of course we’re not talking to them all the time. We’re working with their IR officer, the CFO, the CEO, to go meet with new investors. We’re talking to them about strategy. We still have board seats in a lot of these instances so we’ve got influence, but that complete transparency from when we’re going to sell type perspective, it’s just not the same because of the way the deals are structured.
Gautier: Actually, it just struck me now it’s quite a paradox because in the US again, we say it’s more liquidity. You could argue it should be easier to tap the market when you want to sell and go fast. When in Europe, actually maybe you should do a bit more marketing when you’re doing a sell-down but it seems again, it’s very different and the opposite actually.
Eric: Yes, in the US your first year post going public before you’re a well-known season issuer, you’ve got to have your prospectus be public out there for 48 hours. It just forces issuers to do marketed transactions which arguably at the outset of the life as a public company, that’s the better route because you give people more time to digest. Anyone that missed the IPO now has more time to diligence this investment. You go on and tell your story off a new quarter of earnings where ideally you have outperformed what your analyst model would suggest.
To me, that feels like the right setup, particularly at the outset. Again, can’t change regulations where they are.
Gautier: We’re getting close to the end and maybe there’s one question I would like to ask you again because we have a lot of CEOs and CFOs listening to the podcast and probably thinking to IPO their company as well. Given your knowledge and experience and interaction with a lot of those portfolio companies, any great advice you would like to give to those executives thinking to IPO and how to best get it done basically?
Eric: Yes, so I think I talked a little bit about the mentality around shifting from EBITDA to P/E and doing that a little bit sooner. The one thing we have always consistently found is your finance function is always understaffed. Do not wait until three months prior to the IPO to bring someone on because they’re going to need six months to ramp up, bring them in a year ahead of the process so that they’ve had time to adjust, learn the business, and can actually be additive in the process. Irrespective of what type of company you are, tech, healthcare, consumer, industrials, the finance function is always understaffed.
That’s my big takeaway. The other piece is around IR. IR can be really value-enhancing to an IPO process. There’s always this risk you run, which is you hire someone, and then the IPO gets delayed. Then you have to figure out what happens in that situation to that person. The reality is, if you feel pretty good that you’re going to be going public at a certain period, bring them in as early as possible because again, just like the finance function, they’re going to need time to ramp up. Then once they are at run rate functionality, they’re the right-hand man of the CFO during that entire process.
They can take so much of the burden off of management, whether it’s managing banking relationships, whether it’s canvassing the investors, whether it’s just working on presentation materials, and giving your advisors the information they need to write the prospectus or build the model. It is an incredibly useful person to have and you’ll always be grateful that they’re trained enough to speed versus you are doing the training while simultaneously trying to take the company public while simultaneously running the company to hit numbers that you’ve promised.
Gautier: Yes, this IR point is a very valid one, and too often we see companies with no IR, the IPO and then even after, hiring halftime IRs and I think very often underestimate date as a role. The market is a bit insecure when you invest in a new company. I think it’s important to keep communicating and having a good dialogue with investors and making sure there’s good flow of information, good communication. Very often we see some companies reacting a bit late and actually that doesn’t really help them. I think it’s a really good piece of advice.
Any other company you would dream to IPO? If you could have done that IPO, you might do in the future. Which one that would be?
Eric: Yes, that one I do have an answer for. It’s public. We own a position in Flutter that was formally a growth investment in FanDuel, which is the US sports betting application that is taken the country by storm. I’m a avid sports fan and so you talk to anyone that is watching basketball, tennis, football, soccer on the daily, and they’re pretty familiar with this platform. I don’t think Peter Jackson at Flutter is ever going to actually carve out FanDuel because I think it’s just a perfect crown jewel within the empire that he’s built and it’s continuing to do incredibly well.
That would be one where if that ever did come to market, would love to be involved. Also, just given KKR’s prior ownership, there’s obviously a relationship there, but just feel like what they’re doing is quite different. They have the best UX, the best live-streaming content. I think that leads to the best engagement and so as a result they’re going to just continue to take market share and it’s pretty clear across all the platforms the best. That’s one where selfishly I’d be fairly interested just given my familiarity with the platform.
Gautier: Now. I hope they heard it and maybe then they’ll call you back.
Eric: We’ll see.
Gautier: Okay. Eric, thank you very much for taking the time. It was a very interesting discussions. Highly appreciate.
Eric: I appreciate it. Thanks, guys for having me.
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