How does the 'IPO discount' work in the model?
The IPO discount is the pricing haircut on an IPO versus a strategic sale. IPO buyers are institutional asset managers who pay more conservative multiples than strategics with synergies.
Typically a −10% discount to trading comps, plus 7–10% of IPO costs (underwriting, legal). Net effect: IPO net proceeds around 15–20% below a comparable strategic sale. In the middle market this almost always makes the strategic sale preferable, unless the sponsor wants public currency for M&A or a partial exit for lock-up diversification.
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| Exit option | Multiple | EV | Net proceeds |
|---|---|---|---|
| Strategic Sale (+ synergy premium) | 11.0x | $550m | $550m |
| IPO before discount | 10.5x | $525m | – |
| IPO discount (−10%) | – | −$52.5m | – |
| IPO costs (7%) | – | −$36m | – |
| IPO net proceeds | – | – | ~$436m |
| Sponsor-to-Sponsor | 9.5x | – | $475m |
On net equity to the sponsor: Strategic Sale > Sponsor-to-Sponsor > IPO.
- Partial exit: the sponsor can sell 30–50% and keep the rest (lock-up typically 6 months).
- Liquidity optionality for future tranches.
- Public currency for M&A financing.
The IPO discount + underwriting cost are often underestimated — typically a 10–15% haircut in total. Lock-up period: the sponsor cannot exit fully at once, market risk over 6–12 months.
Question: "When do you choose an IPO despite the discount?"
Answer: "When the sponsor's brand needs public visibility, an M&A pipeline with equity currency is possible, or the strategic bidder pool is too small. On a pure-IRR view the strategic sale is usually better"