PE Firms have Decreased Technology IPOs

When people think of private equity (PE) firms, they usually think of large amounts of money to acquire and improve the value of private companies (or public companies taken private). After talking to entrepreneurs, executives, and investors over the last few years I’ve learned another fact about PE firms: they’ve decreased the number of technology IPOs. Yes, Sarbanes Oxley has made it much more expensive and laborious to be a public company, and that is the major force of the decline, but let’s look at how PE firms have also decreased technology IPOs:

• PE firms, especially when debt was much cheaper, leveraged up companies as the main source of capital, and that provided the fuel needed for growth in lieu of the public markets
• PE firms, because of US tax laws related to debt and dividends, are able to take a relatively small amount of money, proportionate to the company value, and immediately make money off a deal (imagine buying a $100 million company with $20 million of equity and $80 million of debt, adding $25 million more of debt, then issuing a $25 million dividend to preferred shareholders to get the equity back)
• PE firms have provided liquidity to shareholders (employees, founders, and investors) of fast-growing private companies with substantial enough revenues to go public, so that the company can continue to grow without the scrutiny and distractions of being public

Thus, many technology companies that would have historically gone public for liquidity and growth capital are instead staying private much longer due to PE firms. PE firms have decreased technology IPOs by providing an alternative source of substantial capital.