Private equity investors’ ability to sit still amid turbulent markets has long distinguished them from their public-market peers. The combination of extended investment horizons and hands-on management gives buyout firms latitude to look through volatility, concentrating instead on company-level fundamentals and operational levers. When public markets falter, private sponsors can continue to back their investment theses with a steadiness unavailable to managers under the scrutiny of quarterly earnings.
This contrast has turned public markets into a fertile hunting ground for assets. Over the past couple of years, listed firms have seen their valuations whipsawed by market sentiment and macroeconomic shocks. By comparison, private markets, insulated from the same feedback loop of daily pricing, have maintained loftier deal multiples and entry valuations.
Delistings, in turn, have provided buyers with a cost-efficient entry point into undervalued companies. Amid a challenging dealmaking environment, these dynamics have propelled take-private transactions to become a relative bright spot. These deals have dominated the megabuyout segment and, in turn, driven a hefty share of the industry’s deal value. Notably, beyond opportunistic motives, structural forces — including record dry powder, tighter regulatory scrutiny of public companies, and the growth of private credit — have helped fuel the momentum behind these transactions.
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, driving a surge in take-private activity in recent years. Although equity markets have rebounded, with indexes near all-time highs, software valuations remain widely dispersed, and market gains are increasingly concentrated in the so-called “Magnificent Seven”.
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.
A closer look at Zuora and Smartsheet, two recent private equity delistings, illustrates how firms are targeting companies that went public during the ZIRP era and how value-creation strategies can vary depending on the underlying dynamics of each asset.
Zuora’s revenue multiple steadily declined since its 2018 IPO, plunging after 2021 and settling between 2-3x prior to its acquisition, placing it in the bottom quartile of public cloud companies. The company also faced negative free cash flow and 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 stabilized near the median for SaaS companies. Despite pursuing aggressive revenue growth during its ZIRP-era IPO, the company reached positive free cash flow, with growth and margins approaching typical SaaS benchmarks before its acquisition.
In other words, Smartsheet stands out as a healthy software company, making its take-private narrative lean more toward a growth play. For example, 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 could see another opportunity to replicate that strategy and drive similar multiple expansion.
Broader discounts in international equity markets have become a notable driver of take-private activity. EMEA targets have attracted US private equity sponsors, who have benefited from lower regional interest rates and valuations that lagged those in the US.
UK delistings in particular have been in the spotlight, coinciding with ongoing criticism of the London Stock Exchange whose complex and costly regulatory framework has deterred some companies from listing domestically and likely contributed to the wave of take-private activity.
Taken together, these factors have created a fertile environment for acquiring undervalued assets. Darktrace, one of the largest European take-privates in recent years, was acquired by Thoma Bravo at an 8x EV/revenue multiple — well below the 23x and 20x multiples commanded by US cybersecurity peers CrowdStrike and Cloudflare.
Similarly, corporate governance reforms have turned the Tokyo Stock Exchange into a prime hunting ground for private equity. In 2023, the Japanese government and the exchange introduced measures aimed at improving efficiency and shareholder value, including a mandate for companies with a Price-to-Book ratio below one to take steps to boost corporate value.
Several other factors add to the appeal. Ultra-low interest rates provide access to cheap debt, improving the economics of buyouts, while Japanese companies remain significantly undervalued compared with American peers. For example, US firms typically trade at 11 times operating profit, whereas Japanese companies cost around seven times operating profit. This steep discount offers immediate opportunities for value creation.
This combination of regulatory and structural tailwinds has accelerated take-private activity. Blackstone, for example, launched a $3.5 billion tender offer for IT services provider TechnoPro, marking its largest investment in Japan to date. EQT also announced plans to privatize elevator and escalator manufacturer Fujitec for $2.7 billion, representing its biggest buyout in the country. These deals underscore the growing momentum for delistings in Japan.
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, public company valuations have offered buyout firms discounted entry points, as reflected in the notably higher multiple expansion on these deals compared with the broader private equity market.
The short-term orientation of many public investors often makes it difficult for companies to execute long-term value creation initiatives or for more complex assets to achieve valuations that reflect their intrinsic worth. Strategic shifts — whether in business models, cost structures, or go-to-market approaches — tend to spark share price volatility that many public investors are unwilling to tolerate.
By going private, companies gain the latitude to pursue multi-year transformation plans without the pressure of quarterly results. This dynamic is particularly relevant for firms with intricate business models or bundled assets that are difficult for CFOs to present in a straightforward way to shareholders. In these cases, private equity investors have the ability to dig into the financials, identify inefficiencies, and chart strategies to streamline operations or repackage the business in a more coherent form.
At their core, take-privates are about identifying attractive entry points outside of the private universe. While public markets currently hover near record highs, the broader financial environment appears to be entering a phase where volatility and uncertainty are defining features. That backdrop is likely to create openings for private equity firms to capitalize on market dislocations as they arise.
The structural factors discussed here will also sustain activity. Many companies still operate with business models that public markets struggle to value, wide disparities in equity valuations persist across sectors, and international markets remain fertile ground for opportunities.
Explore our Mid-Year Private Equity Report for a look at this year’s take-privates and what’s ahead for these transactions.
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