In the past two months, three familiar building products names—Ply Gem, HD Supply and Stock Building Supply—have all filed for or completed initial public offerings (IPOs), their first sale of equity shares to the general public in exchange for capital.
We tend to think of IPOs as a stage reserved only for select private companies that have posted years of stellar growth or financial performance; the major league debut of sorts for minor league phenoms. We also associate IPOs with an exit or liquidity event; the ultimate pot of gold for companies’ early investors and entrepreneurs, usually during periods of robust stock market, sector, and business performance.
IPO volume is accelerating across most U.S. sectors with the climb in stock market and corporate profits over the past two years. But while housing continues to strengthen, single-family starts are still far from historic average levels. Building products companies’ sales and profits are improving, but still far from historically strong. And the costs, liability, scrutiny, and resource burdens that public companies face has only increased in recent years. So why the recent flurry of building-products company IPO activity?
Here are some explanations:
Cheap Equity Capital IPOs are compelling capital-raising avenues for companies that can qualify and want substantial equity capital to de-lever (read: de-risk) their balance sheet and/or grow aggressively (whether organically or through acquisitions). Public equity provides the lowest cost of equity capital available, meaning the least amount of equity ownership given up per dollar of capital received. Furthermore, once public, a well-performing company can continue to tap this vast source of cheap capital.
Valuation Due to lower perceived business and investment risk, public markets typically value companies substantially higher than private markets. The average building products company is trading at an enterprise value of more than 15 times last 12 months (LTM) EBITDA. Ply Gem went public at 17 times and HD Supply at 12 times. Stock’s proposed $175 million equity offering is not valued yet. But these public market valuations are eye-popping and translate into cheaper cost of capital.
Setting the Stage While IPOs don’t usually create immediate liquidity for existing investors and management, they set the stage for future liquidity. After the “lock up” period for large pre-IPO shareholders and management (insiders) expires, they can often offer their shares for follow-on sale in the public market. This process takes time. So investors that want to exit their investment within the next one to two years may choose to file an IPO to set the stage for their ultimate exit at a time of their choosing, right after lock up expiration or perhaps when the company’s valuation is higher.
Timing For many private companies, the potential advantages of being public—cheap and abundant capital, maximized enterprise valuation, and investment liquidity—trump likely burdens and cost. Savvy investors and entrepreneurs know that access to the public markets is fleeting. The stock market is climbing now and interest in building-products companies is improving with housing fundamentals. They know many factors beyond their control could close the IPO window. So perceiving that window open and temporary, private building-products companies with public market aspirations would rather be early than late and are hitting the window aggressively.