During ZIRP, tech stock valuations heavily rewarded revenue growth while detaching from profitability. This dynamic faced a sharp reckoning in 2022, as the Federal Reserve launched an aggressive rate-hiking cycle to combat record inflation. Rising borrowing costs quickly exposed the fragility of growth-at-all-costs business models, compressing valuations and multiples.
The correction sent the Nasdaq Composite down by 32.5% in 2022, creating prime conditions for private equity investors to shop for bargains and driving take-private activity to surge from $65.3 billion in 2020 to nearly $200 billion in 2022. While overall equity markets have since rallied, the recovery has almost solely been driven by the “Magnificent Seven.” Many IPOs from the ZIRP era have stumbled, with share prices plunging sharply from their pandemic highs and struggling to recover.
Despite rising borrowing costs, public markets have remained a fertile hunting ground for private equity, fueling a wave of high-profile Nasdaq delistings in recent years. Blockbuster acquisitions of Qualtrics, Toshiba, and Coupa led take-privates to consume an outsized share of overall buyout activity in 2023. Even with transaction volume starting to level off in 2024, public companies remain top targets for private equity, with a strong showing of headline-grabbing deals already this year.
A confluence of market trends has driven an uptick in take-private activity. A growing mountain of dry powder, enhanced scrutiny on public companies, and continued market dislocations have all pushed private equity firms to pursue public companies more readily.
Take-private targets are underperforming companies whose share prices have steeply declined and fallen out of favor with public markets. The ZIRP hangover has left a large pool of these assets for private equity to capitalize on. Today, public markets demand capital-efficient growth, and a large cohort of companies that IPOed in recent years are failing the rule of 40 and struggling to attack the tradeoff, especially on the profitability side. In 2022 and 2023, the large majority of companies taken private fell into this camp.
Reviving the Rule of 40 in this cohort of ZIRP IPOs offers private equity a clear path to unlock value. On the profitability side, enhancing EBITDA margins without impacting growth significantly can materially boost enterprise value. Operational enhancements also strengthen balance sheets, enabling inorganic growth through strategic M&A to cement market positions and further margin uplift through the multiple expansion of a larger, scaled, and profitable business.
This said, many public companies have started to make profitability gains over the past year, and margin expansion isn’t the only value creation lever available to buyout investors delisting public entities. For example, Brian Ruder and Dipan Patel from Permira recently spoke about their “buyout investor with a growth mindset approach” to take-privates. The duo discussed how the firm often looks to identify the maximum efficient revenue growth a business can take on through capturing adjacent geographies, product expansion, etc. While this approach compresses short-term EBITDA, they discussed the value of optionality it provides at exit.
“The golden rule of take-privates is that you have to have a very different plan to the public consensus plan.”Dipan Patel, Partner at Permira
“The golden rule of take-privates is that you have to have a very different plan to the public consensus plan.”
Beyond the market corrections forcing companies to balance growth and profitability, misunderstood assets trading below their intrinsic value are also of interest to PE. For example, Endeavor Holdings, a sports and media giant, struck a deal to go private with Silver Lake earlier this year after its CEO criticized the market’s failure to grasp the company’s strong fundamentals.
“The very complicated businesses to understand what’s going on underneath the covers are the perfect setup for us.”Brian Ruder, Partner at Permira
“The very complicated businesses to understand what’s going on underneath the covers are the perfect setup for us.”
This cohort of companies makes prime targets for take-privates. Some have complex business models or are bundled assets that are hard for CFOs to report on in a digestible format for public shareholders to understand. In these scenarios, PE investors can look under the hood, get a deep understanding of the financials, and craft a plan to streamline the business or repackage in a more coherent way.
A closer look at Zuora and Smartsheet, two recent private equity delistings, highlights how these dynamics are playing out in take-privates and the varied strategies firms can apply depending on the asset.
Zuora’s revenue multiple has steadily declined since its 2018 IPO, plummeting post-2021 and recently stabilizing between 2-3x, placing it in the bottom quartile of public cloud companies. Its free cash flow margin has been negative for a long time (although it’s projected to turn positive in fiscal year 2025). Additionally, the company has grappled with slowing revenue growth.
At a high level, it appears to be a prime opportunity for Silver Lake, which announced its plans to acquire the business in October to turn around a company with a low Rule of 40 score. It could also fit the profile of a misunderstood, complex asset ripe for repositioning.
Smartsheet’s revenue multiple took a sharp hit post-2021 but has since stabilized near the median for SaaS companies. Despite prioritizing aggressive revenue growth during its ZIRP-era IPO, the company has achieved positive free cash flow margins, with growth rates and margins now aligning more closely with today’s average SaaS benchmarks.
In other words, Smartsheet stands out as a healthy software company, making its take-private narrative lean more toward a growth play. Vista Equity Partners may position it as a platform company, leveraging its cash flow to fuel bolt-on acquisitions. Having previously owned Wrike — a similar asset they sold at 12x forward revenue in 2023 — they likely see another opportunity to replicate that strategy and drive similar multiple expansion.
Supply-side market dynamics are just one element driving the take-private boom. Private equity dry powder remains at record highs, heavily concentrated among a few mega-firms with the purse strings to execute large-scale deals. With cash reserves swelling, sponsors face mounting pressure to deploy idle capital that’s racking up fees. As firms look for opportunities, public market dislocations have provided relief from valuation uncertainty that has plagued private markets in recent years.
Higher rates have challenged private dealmaking as sellers cling to price tags rooted in a bygone low-rate era creating a valuation gap that market participants have struggled to bridge. Here, the transparency of public company valuations has provided buyout firms with a convenient workaround to getting deals done, offering pricing clarity to craft acquisition strategies and value creation plans for public targets.
Further, there is a mutual appeal to these transactions. Active, long-hold fund management is becoming a much smaller slice of the public markets. The resulting inherent short-termism creates its own challenges. Moving balance sheets behind closed doors has been a welcome move for many companies, particularly midsize tech companies grappling with the growing burdens of public market scrutiny. The high costs of being public — Sarbanes-Oxley compliance, annual audit fees, and legal expenses quickly add up. Avoiding these operational burdens is a not-to-be-ignored benefit of going private.
Moreover, modifying business models, adjusting cost structures, shifting GTM approaches, and more tend to send share value on a volatile ride that most public investors don’t have the patience for. Going private allows companies to pursue multi-year strategic initiatives without the pressure of short-term results. Never mind that with many companies trading below recent peak multiples or industry averages, the premiums of these transactions present a convenient outlet to maximize shareholder value.
The cost and availability of debt have posed the biggest headwind to take-privates post-2022, and private credit has played an important role in helping these transactions remain elevated relative to historical levels. Many sponsors have tapped private legacy financing agreements at public companies secured before rate hikes to avoid debt repricing and keep capital costs low.
More broadly, as private credit has matured to handle larger and more complex transactions, direct lenders have become go-to partners for these large take-private deals due to the flexible terms and pricing certainty. Further, in the wake of the regional banking crisis, bank retrenchment left the syndicated loan markets largely inaccessible.
As a result, private credit has financed an increasing share of deals, with direct lenders backing around 81% of all public-to-private PE transactions in 2023. Even as banks start to regain market share this year, many high-profile deals this year have continued to choose direct lenders.
For instance, Permira’s $6.9 billion take-private of Squarespace completed in October secured a $2.7 billion loan from Blackstone Credit and Insurance, Blue Owl Capital, and Ares Capital. Similarly, the Adevinta take-private completed in May included one of the largest private debt packages in history backed by a consortium of private credit funds.
Will the take-private wave slow down? Perhaps transaction volume starting to level off this year suggests that much of the low-hanging ZIRP fruit may have already been picked. Then there’s the trajectory of interest rates which act like a double-edged sword to supply and demand dynamics.
Lower rates could spark deal activity by making financing cheaper for PE investors, but they often lead to higher valuations, potentially narrowing the pool of attractive targets and cooling supply. However, the Fed’s rate cuts have yet to ignite a significant rise in public multiples and lingering uncertainty over persistent inflation from potential tariffs continues to cast uncertainty on the long-term rate environment.
The uptick in take-private activity has also drawn an interesting juxtaposition to the broader desire among all private market participants — especially venture fund allocators and investors — for the public markets to reopen. Ongoing delistings highlight the uphill battle for many VC-backed companies striving to achieve and maintain the metrics needed to go public.
As anticipation builds for the IPO logjam to break in 2025, all eyes are on how the market will receive this fresh cohort of companies and their ability to drive rapid growth, deliver profitability, or achieve a healthy mix of both. Private equity sponsors may continue to step in and solve the equation for those who can’t.
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