Jeans maker Levi Strauss & Co surged 31.8% on debut today after pricing its IPO above range for base proceeds of $623.33m, the most confident sign yet a new-issue revival is under way after a disastrous start to the year.
Levi Strauss is the biggest IPO of the year so far and comes ahead of chunky near-term offerings such as Lyft, Tradeweb Markets and Change Healthcare, and maybe Uber (looking like April timeframe) as the biggest of them all.
The demand for Levi Strauss was clearly very strong, even stronger than you might expect for a company up against the vagaries of the fashion retail business.
This is a brand that has stood the test of time, the company has some growth (14% at the top line last year) and has been able to expand its margins by selling direct to the consumer, the trend that is likely killing off large parts of the traditional retail sector.
One reservation – apart from whether the company’s current growth is really sustainable – is that the controlling Haas family sold some of its stake at the IPO and may not be done. The prospectus is not explicit about their plans, which is probably intentional, but it means that a secondary sale is not out of the question later this year.
As investors counted their winnings, it was easy to miss that another IPO scheduled for this week, human resources software company Alight, opted to defer its IPO ahead of pricing tomorrow night.
Alight is backed by private equity firm Blackstone, which pulled the plug as investors showed reluctance to pay up inside the $22-$25 range for a company that is not growing as fast as the usual software IPO.
In fact, the way the financials are laid out in the prospectus, it is difficult to make prior-year comparisons.
The outcome shows that investors are not in a mood to buy anything, despite the dearth of IPOs so far this year. This could also be read as investors being extra cautious about current valuations, including those of the peers against which Alight was valued.
The other mark against Alight is its private equity backing, and it is a legitimate question whether the sponsor-backed IPO market, a major avenue for the monetization of sponsor investments, is broken.
Though Blackstone was able to bring a large number of its US portfolio companies public in the past five years, it hasn’t done so many in the past year or so.
The same goes for the other big private equity firms, now the center of much power on the Street (in part because they pay the biggest fees to investment banks).
The big miss last year was Apollo Global Management’s IPO of home security firm ADT. The deal priced well below range but ADT stock still trades at price less than half ($6.57 today) the level at which it went public at ($14) in January last year.
In fact, the private equity firms have produced some great public companies over a longer timeframe, but it is often the case that they perform poorly early on (2015’s First Data IPO is another classic example) because private equity firms on principle do not sell assets cheap.
Private equity firms have also gravitated to traditional industrial companies that can be bought cheap for their lack of growth but still generate consistent enough cashflow to support their financial engineering – that is, the pay down of hefty debt loads.
These companies typically come to market with high debt levels as a legacy of their leveraged history, though usually IPO proceeds are applied to bringing down debt to more manageable levels.
Change, a health IT company formed from a deal with drug distributor McKesson, is the next Blackstone portfolio company looking to get public. It is said to be looking to raise $1.5bn-plus but the Alight outcome suggests it is no fait accompli.