Private IPOs: The Latest Wall Street Trend

Bankers, private equity firms, and institutional investors have been eyeing a new investment trend—private IPOs. With the public IPO market displaying a choppy performance over the past two years, investors are looking for alternative investment structures.


Enter the private IPO. A private IPO is essentially the process of raising capital through a private placement. A select group of investors is offered unregistered securities to purchase a certain percentage of ownership directly in a company. The fact that the offered securities are not registered with the Securities and Exchange Commission, or SEC, avoids certain SEC reporting requirements and the additional costs associated with registering securities.


A large anchor investor is a helpful ingredient for a private IPO. An anchor investor can optimize the transaction certainty and help with raising more capital overall. Such investors are typically longer-term investors such as mutual funds, sovereign wealth funds and other institutional investors.


Investors in a private IPO often will invest through a co-invest aggregated entity. Investment in this pooled investment vehicle is typically limited to large institutional investors.


EQT, a Stockholm-based private equity firm, has recently brought the private IPO into the spotlight. EQT has been growing frustrated with the disappointing recent performance of public markets and is considering a private IPO for one of its portfolio companies. Hellman & Friedman, a San Francisco headquartered private equity firm, used a private IPO structure in 2023 in order to sell a minority stake in the insurance brokerage firm Hub International to a small group of institutional investors. 


The private IPO process is significantly faster than the public IPO process. Unlike a public IPO, a private IPO does not involve a glamorous bell ringing ceremony or other splashy marketing efforts. A private IPO also avoids the time-consuming SEC registration process, which includes filing multiple rounds of S-1 registration statements with the SEC and additional SEC registration and reporting requirements.


A private IPO can also be a strategic first step towards ultimately pursuing a traditional public IPO. A private IPO enables the company to raise money from passive investors while still operating the company privately. The passive investors gain a minority stake in the company prior to the company going public in a traditional IPO.


One drawback of a private IPO for investors is the lack of liquidity. While an investor in a private IPO structure may be able to negotiate better prices and bigger allotments of shares, there is uncertainty about when in the future the investor will be able to get liquidity. Sometimes a private IPO may be structured to provide certain liquidity windows during which certain minority investors are granted the right to seek liquidity or to invest more in the company.


From the company’s perspective, one drawback of a private IPO is dilution. The sale of direct equity to outside investors dilutes the company’s existing equity ownership. Furthermore, a large investor may be able to negotiate minority approval rights. Such minority approval rights may include the ability to block the sale of the company within a specified timeframe or requiring the company to meet certain performance thresholds before pursuing a traditional public IPO. A private IPO can also impose internal burdens for the company’s investor relations team. For example, the investors in the private IPO may request certain ongoing information sharing and reporting to the investor base on the company’s financial and other metrics.