In the listed space, we have a very particular definition of a ‘quality’ company. We look for steady revenue, predictable profits, stable cash flows, and low leverage. Every investor is very comfortable with investing in these companies.
In private equity, investors look for high growth and large market share, with preferences angled towards duopolies. Their aim is to invest money in the nascent stages of the business, keep monetizing regularly to fund growth needs, and create strong franchises. Needless to say, when the opportunity arises, the investors will be willing to cash out and look for the next opportunity. The IPO market mostly had stories of quality companies offering decent growth prospects, healthy cash flows, and attractive prospects built into every offer. This is about to change dramatically.
The current IPO market seems to be getting ready to become a blend of the two. Businesses, even after listing, may continue to burn cash and be unprofitable for a few years till they stabilize and adapt to the public markets.
The investor is now at a crossroads. You need to decide if you can take the added risk of unstable cash flows and non-profitability. The time to decide is now!