European private equity IPO door is only half open

Beauty treatment. Two European stock market listings sent a distinct message to global private equity firms sitting on $3.2 trillion of unsold assets. EQT-backed skincare specialist Galderma and CVC-controlled beauty retailer Douglas both priced shares cautiously in a bid to wedge Europe’s initial public offering (IPO) door open for others. But Douglas’s debt spooked investors. That suggests discounts work, but only for the strong.

Buyout firms are in a pinch. Higher interest rates and a fragile global economy have widened the gap between what buyers are willing to pay and sellers are willing to stomach. Last year, private equity-backed sales and listings came in at $345 billion globally, a 44% decline from 2022, and the lowest level since 2013, according to research from Bain & Company. With limited options, Germany’s Douglas was first out this week. Bankers were understandably applying a steep discount to pique investors’ interest. The final pricing of 26 euros a share meant the retailer was being valued at about 8 times the 726 million euros of EBITDA it delivered in the 12 months to September 2023. That was noticeably lower than its Nasdaq-listed peer Ulta Beauty, which trades on over 12 times. Yet the cautious pricing was not enough to offset concerns about Douglas’s heavy debt load. By the end of last year, it had topped 3 billion euros, or over 4 times its trailing EBITDA. Despite the hefty discount, shares in Douglas were trading at 15% below their IPO price on Friday.

Galderma, however, fared better. The Swiss maker of Botox competitor Azzalure and sensitive skin cleanser Cetaphil was similarly cautious on pricing. The near 16 billion Swiss franc enterprise value at its market debut was over 18 times its 2023 EBITDA, cheaper than rivals like L’Oréal which trades on around 24 times, according to Breakingviews calculations.

However, Galderma benefited from its relatively healthy balance sheet and strong growth. Under EQT, group sales expanded at an annual compounded rate of 12% since 2019, above a 7% growth for the sector according to the company. CEO Christian Sinding also hiked the EBITDA margin to a handsome 23% of revenue last year.

The stark difference between the two offers a template for private equity-owned would-be followers. First on the list are Permira-owned luxury brand Golden Goose and Hotelbeds, a Spanish hotel room booking firm backed by EQT and Cinven. Owners may be deterred by Douglas’s ropey performance. But the European equity market is edging to a near record high, showing investors remain keen to invest in the right stocks. Galderma’s playbook of offering a discount on a healthy company is the best recipe for a pop.