The IPO slump has lasted almost two years. IPOs in Europe are now slowly picking up speed again, as the stock markets have calmed down, the share price performance of companies following IPOs has improved - as the examples of the armoured gear manufacturer Renk or the drug syringe manufacturer Schott Pharma show - and investors are therefore more interested in new issues again. In particular, a large backlog of IPO candidates has built up in the portfolios of financial investors during the downturn, which private equity firms are hoping to clear.

CVC has now ventured out of cover with the perfumery chain Douglas as the first major of these IPOs this year. A number of other companies from private equity portfolios across Europe are soon to follow. The list of these IPO candidates is long: The former Nestlé skincare division Galderma from the portfolio of Swedish financial investor EQT, the Italian luxury trainers manufacturer Golden Goose from private equity firm Permira or the Spanish travel website Hotel Beds from private equity firm Cinven are examples from abroad. In Germany, the heating meter reading company Techem from the Swiss Partners Group, the petrol card provider DKV Mobility (CVC), the long-distance bus operator Flix (General Atlantic), the scientific publisher Springer Nature (BC Partners), and the generics company Stada (Bain and Cinven) are all potential IPO candidates.

All these companies have one thing in common. They are highly indebted. It is often four or five times the operating earnings before interest, taxes, depreciation and amortisation (EBITDA), as in the case of Douglas. Sometimes, it is even more if the companies believe they can have a higher level of debt because they have reliably predictable earnings, such as the heating meter reading company Techem. In times of zero interest rates, this was often tolerated in IPOs. The focus was more on growth potential and the size of the "addressable market" than on profitability or debt.

But times have changed with high-interest rates. Investors will no longer tolerate a mountain of debt that is so high that there is too little left over for growth investments and profit distribution to shareholders after paying the interest on the debt. Douglas will, therefore, use the proceeds from the issue to reduce the debt mountain of more than 3 billion euros. Debt is to be reduced to 2.7 times the operating profit at first and shortly afterwards to only twice the operating profit. The pace of the planned debt reduction is high. This shows how strong the company's expected cash flow is.

To ensure that the IPO is a success, CVC even wants to use a loan collateralised by Douglas shares. CVC will inject the money into Douglas as additional equity. This means that the capital increase for the IPO, the proceeds of which will be used exclusively to reduce debt, will not have to be as significant. The size of the IPO remains manageable, with planned proceeds of 800 million euros. In this respect, the clever construction of the Douglas IPO, in which the issue of leverage is largely eliminated right from the start, could perhaps even serve as a blueprint for further debuts in private equity hands.

However, the level of debt considered acceptable for an IPO varies depending on the sector and cash flow strength. More than three times EBITDA is usually not accepted in Europe. In this respect, Techem, Stada and Springer Nature still have a lot of debt reduction ahead of them if they really want to go public. Fitch estimates Galderma's debt ratio at 6.4 times EBITDA. Techem's debt was also six times EBITDA at the beginning of 2023 - a very high figure, but not entirely unusual for private equity portfolio companies. Still, if Techem is not sold to a financial investor such as TPG and Partners Group decides to go public, the debt (currently EUR 2.4bn) would have to be reduced. Otherwise, an IPO will not happen.