Despite the continuation of a decade-long bull run in 2019, the number of US IPOs dropped last year. And businesses with private equity backing were no exception.

Make no mistake: As LPs pour more money into alternative assets in search of big returns, portfolio companies are staying private for longer and taking advantage of an excess of available cash in the private markets. That's not great news for the narrative around IPOs, which have garnered as much attention of late for high-profile flops than actual capital returned to investors. 

The number of PE-backed IPOs in the US dropped 50% YoY in 2019, going from 46 to 23, according to PitchBook's 2019 Annual US PE Breakdown. The total value of the IPO offerings dipped nearly 30%, going from roughly $47 billion in 2018 to some $33 billion last year.

Why the steep decline? 

IPOs got off to a slow start when the US government was shut down for most of January, leaving the Securities and Exchange Commission unable to issue the needed legal approvals for companies to list on the public market. As a result, there were zero IPOs until January 31, when Fortress Investment Group-backed New Fortress Energy finally broke the lull by raising $280 million in its public debut.

On a broader level, the total number of private equity exits in the US dipped more than 15% in 2019. And there were just 53 exits of $1 billion or more, marking a significant drop from 95 such exits in 2018.

There was also a chilling effect on the overall IPO market due to high-profile VC-backed companies that disappointed in their trading debuts, including Uber, Lyft and Pinterest. But none were more dramatic or downright strange than WeWork's pre-IPO implosion, a debacle that is expected to make the public markets increasingly wary of money-losing startups that employ a growth-at-all-costs strategy.
 
Private equity had its own high-profile flop when Endeavor, a Hollywood talent agency that also owns the mixed martial arts organization UFC, delayed a September IPO that was at one point expected to value the company at $8 billion and then withdrew the filing in October. The listing would have marked a huge return for Silver Lake, which first backed the business with a $200 million minority investment in 2012, then invested another $500 million in 2014 when it merged with IMG. Endeavor reportedly said it could revisit a possible offering this year but has announced no specific plans.
 
Matters weren't much better at SmileDirectClub, a Nashville-based startup that offers direct-to-consumer teeth aligners and braces. The company went public in September, raising some $1.3 billion at an initial market cap of roughly $8.9 billion. But investors haven't been impressed with either the company's growing losses (nearly $388 million in 3Q 2019) or the concerns about the safety of direct-to-consumer orthodontic products, which have been criticized by dental professionals.

SmileDirectClub began trading below its IPO price of $23 per share and has since lost more than half of its market cap. That's been less than ideal for Clayton Dubilier & Rice and VC firms Kleiner Perkins and Spark Capital, which backed the company through a $380 million private placement in late 2018 that valued the business at some $3.2 billion. 

Granted, there were a few notable PE-backed success stories last year. New Mountain Capital held a position valued at $1.5 billion in Avantor, a chemical manufacturer for the life sciences industry, when the company raised $2.9 billion in May by selling 207 million shares for $14 apiece in the largest PE-backed IPO of 2019. That's no small feat, considering New Mountain originally formed the business in 2010 at an enterprise value of $290 million, then grew the company's revenue from $414 million in 2009 to $5.9 billion in 2018, pushing the market cap to over $10 billion. 

The upcoming year already looks more promising for PE-backed IPOs, especially if the public markets continue their ascent. That could potentially entice GPs that want to sell down part of their stake in a portfolio company through an IPO while retaining shares.

There's also a backlog of companies waiting to list. Topgolf, a popular driving range operator backed by Providence Equity Partners, is reportedly lining up an IPO for sometime this year that could value the company at some $4 billion, according to Bloomberg. And there are others, including McAfee, a cybersecurity firm backed by TPG Capital and Intel, and Madewell, an apparel business owned by J.Crew.

Now they just need to avoid any more high-profile flops. 

Featured image of the New York Stock Exchange on Dec. 3, 2019, via Scott Heins/Getty Images

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