Doing the Dual-Track Dance

The global IPO market remained healthy in 2018, with nearly 1,400 deals raising over US$200 billion as the year drew to a close, according to figures from consulting firm EY. While deal volume was down from 2017’s 10-year high, the total value of IPOs in 2018 was slightly higher than the previous year. As 2019 begins, the equity markets are experiencing some volatility, but a number of issuers continue to prepare for IPO market windows as they open.

Yet that’s only part of the story. What those numbers don’t take into consideration are the IPOs that never make it across the goal line because a company decided instead to sell, rather than go public.

In fact, more companies are opting to do a “dual-track dance” when looking for an exit strategy. They’ll pursue an IPO, while at the same time entertain offers from private equity investors and strategic buyers. The numbers aren’t well tracked, partly because the sales processes usually involve private companies, but we are seeing heightened interest in dual-track processes.

Ten years ago, such dual-track pursuits were more theoretical in nature and bordered on questions of “what if”? Today, we would argue, current market conditions are such that a dual-track process has now become a requisite for most management and investors of private companies seeking a liquidity event—assuming, of course, that the company is a credible candidate for pursuing an IPO in the first place.

In our experience, companies that successfully maneuver a dual-track exit come out further ahead, primarily because the strategy introduces an added element of competition and price tension into the deal mix, which maximizes both transaction values and terms.

It’s no surprise then that we have seen the use of a dual-track strategy grow in popularity.


However, it’s not just valuations that make a dual-track strategy attractive. Key advantages to a dual-track strategy versus a single-track solution are as follows:

1. Improves pricing and deal terms

As mentioned above, the more parties vying for an asset, the greater the likelihood that you will improve pricing and deal terms. Pursuing both paths flushes out potential acquirors and creates price tension that produces a more robust competitive process in terms of the pricing of securities in the IPO and enhances the potential multiples and vendor-friendly deal terms in the sale of a business, particularly if an auction process is engaged at the same time. For example, knowing that there is a credible private equity or strategic buyer in the wings can increase an IPO valuation. By the same token, buyers may be willing to pay more or accept less favourable deal terms if they know they are going to lose a target to an IPO.

2. Increases transaction certainty

Pursuing a dual-track strategy increases the likelihood of a deal being completed. If an IPO goes south and an issuer is unable to access the capital markets in a timely manner—for example, because of delays involving securities’ regulators or underwriters’ objections—the sale track provides a viable alternative solution.

3. Lowers valuation uncertainty

Academic studies have pointed to the reduction in valuation uncertainty resulting from IPO filings as a major reason for the higher acquisition premiums typically attained through dual-tracking, noting that private targets with higher valuation uncertainty, such as low-profitability companies in research-intensive industries, are traditionally among the major users of the dual-track process.

4. Less impact on timetable

Moving forward simultaneously with an IPO and a sale process ensures alternative liquidity options without negatively impacting the transaction timetable in the event that one strategic alternative ceases to be available to an issuer.

5. Complementary strategy

The legal requirements of an IPO process and the preparation of a comprehensive disclosure document with the requisite financial information assists with, and can be complementary to, the M&A process. There are some synergies that can be attained in the due diligence process that will serve both the IPO requirements and the information memorandum that supports the sale process.

6. Protection of stakeholders

Pursuing a parallel process allows the issuer flexibility in ensuring that the desired treatment for employees, customers, suppliers, and other key stakeholders is achieved.

7. Better efficiency

Being engaged in both processes imposes competitive and time discipline on the participants in each of an IPO and an M&A negotiated or controlled auction sale process.

8. Flexibility for unexpected events

A dual-track approach provides issuers the flexibility to switch to another course of action should any of a range of unexpected extraordinary events occur (for example, a CEO termination, inability to obtain an auditor’s report or to complete the requisite audited financial statements, deficiency in an expert report, inadequate funds to meet working capital requirements, etc.). Pursuing both an IPO and a sale process as part of an issuer’s exit strategy ensures that fewer issuers will be subjected to unilateral determinations not to proceed with a transaction in the late stages of a controlled auction process by a prospective bidder or an IPO transaction by a financing syndicate member.


However, a dual-track process is no cakewalk. We have identified four primary disadvantages when running a dual-track process.

1. Increased complexity

Running two deals increases the level of complexity involved in seeking a liquidity event. Managing relations with financial advisors, investments banks and potential suitors and securities regulators requires skillful execution and planning.

2. Executive exhaustion

Running an IPO sales process and the accompanying roadshow taxes management’s time and company resources. Adding a sales process and possible auction into the mix requires management commitment, flexibility and dexterity.

3. Exposing state secrets

Management has to be prepared to make sensitive confidential trade information available not only to securities regulators, but potential competitors. However, the sales process can be managed in a stealth manner so that some parties are excluded.

4. Increased cost

Running what are essentially two deals will of course drive up costs. However, with proper project management and using a single legal team and financial advisor, those costs can be mitigated. As well, the potential premium that can be attained far outweighs the financial strappings associated with a dual-track strategy.


There is also one wildcard always at play, often underestimated and not controllable—market conditions. They, as much as priorities, will dictate outcomes in a dual-track process.

Current market conditions are ideal for executing a dual-track strategy, and those companies choosing to do so are benefitting. The present cycle is clearly a seller’s market, and we are nearing the 10th year of an upward financial cycle.

In some instances, we have seen a narrowing in the valuation between what the public market is willing to place on a company versus a private buyer. In some circumstances, a private sale can actually garner a premium over what a public offering would render. Now, more than ever, market conditions need to be weighed when considering the viability of an IPO versus a sale.

So where are we in that market cycle? Have we peaked? That’s hard to say, and no one really knows for sure. Capital markets are robust and it is too early to tell whether the upturn in the markets in early 2019 will mark the beginning of another period of strengthening valuations.


There are a number of positive factors that suggest continued strength in the markets.

Acquisitive cycle

Global statistics point to healthy and robust merger and acquisition markets. According to Mergermarket, worldwide deal making hit US$3.5 trillion in 2018, the third-highest annual figure this century, although deal volume fell for the first time since 2010, with 19,232 transactions worldwide.

Cross-border M&A paralleled the overall trend, with a slight increase in value from US$1.27 trillion to US$1.35 trillion, in spite of a 6.6% decline in deal count to 6,405 transactions. In Canada, deal value increased by 13% in 2018, to US$119 billion, according to Bloomberg.

Private capital flush

Private equity is reloading, as investors exit their current investments, and look to redeploy their capital. Meanwhile, new money continues to flow into the private equity space.

Bain Capital noted in its Global Private Equity 2018 report that private equity managers had raised more than US$3 trillion in the previous five years. Of the 38,000 deals globally in 2017, less than 10% involved private equity, leaving room for expansion. Bain reported that the private equity industry is flush with capital and “dry powder” is on the rise, hitting US$1.7 trillion at the end of 2017. At the time of Bain’s report, there were 7,775 private equity firms hunting for deals.

Investment research firm Preqin, which tracks institutional investors, notes that 57% allocate money to private equity. A further 86% of institutional investors plan to maintain or increase their private equity investments and 44% see small- to mid-market buyout funds as presenting the best opportunity. Private equity now ranks as the second alternative asset class after real estate for institutional investors.

Valuations remain high

Bain Capital notes that prices are soaring. The average EBITDA purchase price multiple for leveraged buyouts rose to a historic high of 11.2 in 2017. As well, buyout-backed exits valued at US$366 billion were strong, but still down from the peak of US$464 billion in 2014, suggesting new highs could still be attained. Preliminary figures suggest that LBO purchase price multiples remained at or near 2017’s high levels in 2018.


Some factors have both positive and negative aspects.

Business confidence positive, with some signs of concern

Surveys show that business confidence remains high, so corporate buyers are likewise aggressive when it comes to strategic growth through acquisitions. Bain Capital found that strategic buyers continue to be the primary acquirer in the private equity markets, followed by sponsor-to-sponsor deals and then IPOs.

In Canada, business leaders continue to be broadly positive about the near-term future. However, after reaching near-record levels in mid-2018, the Bank of Canada’s year-end Business Outlook Survey reported a somewhat less optimistic, although still fundamentally strong, outlook. While sales growth appears to be levelling off, plans for increased investment and increased hiring do not appear to have been affected, with the main concerns in most regions being focused on ability to meet demand and labour shortages. A slight tightening of credit was also reported in late 2018.

IPO market volatility

In 2017, the worldwide IPO market hit its highest level since 2007, with 1,624 reported deals. According to preliminary figures from consulting firm EY, 2018 saw 1,359 global IPOs in which US$204.8 billion was raised, a 6% increase in proceeds year-over-year (some late 2018 deals may not be included in these figures). In Canada, the number of IPOs rose from 37 to 54, although cumulative proceeds fell to US$2.2 billion from US$5.1 billion in 2017, with the latter figure having been influenced by the exceptionally large Kinder Morgan IPO. It is not clear whether an observed downturn in IPO activity in Q4 2018 represents the beginning of an ongoing trend, and issuers continue to prepare for IPO market windows as they open.


Nonetheless, there are a number of clouds on the horizon.

Economic cycle long in the tooth

The current US economic expansion and bull market date back to the trough in June 2009, according to the US National Bureau of Economic Research. That makes it the second longest expansion cycle on record. If it continues through the second quarter of 2019, it will surpass the previous record expansion of 120 months. A typical expansion from trough to peak since 1854 is 38.7 months, or 58.4 months since 1945. Accordingly, this expansion is getting long in the tooth.

Deal counts declining

Despite rosy M&A numbers, when you look past the eye-popping valuations, you will see that the number of deals is actually declining, despite strong competition among acquirors. Bain reports that private equity deal count has declined substantially since 2014, off 19% from the high water mark set in the current economic cycle. As noted above, Mergermarket figures suggest that global M&A deal count declined in 2018 for the first time since 2010.

Political and trade unrest

The growing threat of trade wars, the imposition of tariffs and uncertainty around the implications of the recently negotiated United-States-Mexico-Canada Agreement (USMCA) are continuing to impact market conditions. Notably, the repercussions of a US-China trade war appear likely to be a major concern for many investors in 2019. According to Mergermarket, the value of Chinese acquisitions of US companies fell by 94.6% between 2016 and 2018 as China began to focus on non-US targets, notably those in Europe where Chinese acquisition activity rose by 81.7% over the past year. Uncertainty over whether, and in what form, Brexit will proceed is another major issue for investors.

Interest rates climbing

Interest rates continued to rise in 2018, driving up the cost of capital and beginning to squeeze debt-strapped Canadian consumers. In October, the Bank of Canada raised interest rates for the fifth time since mid-2017. As of early 2019, speculation about further interest rate increases in the near term had abated somewhat.

Tax inequality

Canadian tax reform lags the US. The US Tax Cuts and Jobs Act of 2017 has changed the competitive landscape in North America and eroded what was once a competitive advantage for Canadian companies.


One of the most important developments that we have seen emerging in the current economic cycle, as mentioned above, is that the valuation gap between the IPO and sale markets are narrowing. That provides a stronger impetus for companies to consider a dual-track strategy.

One of the factors narrowing the valuation gap between an IPO and a sale has been regulatory change in relation to disclosure in the IPO market.Companies rely on forecasts and other forward-looking information to obtain a high public market valuation. Not long ago, five-year outlooks were customary and were used in corporate roadshows to support planned IPOs.

In July 2018, the Canadian Securities Administrators issued Staff Notice 51-355 on continuous disclosure review covering fiscal years ending March 31, 2017, and March 31, 2018. In it, the CSA tightened the noose further on forward looking information (FLI).

The net effect is that valuations that may be available in an IPO process, may also now be available in a negotiated or controlled sales auction.


There are other capital market developments that are levelling the field between IPOs and negotiated sales that support pursuing a dual-track strategy.

For example, deal factors are shifting. Not only has the valuation delta eroded, but the tension provided by the dual-track process results in many private deals now being structured to reflect public-style deals. Sellers can now negotiate with strategic and private equity buyers to eliminate things like holdback, earns outs and indemnities or use insurance to offload risk around representations and warranties so that they don’t survive the closing, making a sales process much more attractive.


Once you take the market conditions and shifting deal factors into consideration, it’s time to assess and rank corporate objectives and priorities. Balancing these objectives is no easy task. There is no one-size-fits-all template.

For example, both a sale and IPO can address the multiple reasons why a company is seeking a liquidity event. They both unlock value, provide greater access to growth capital at more favorable cost, provide enhanced brand awareness, improve governance, pave the path to succession, and meet the needs of stakeholders and investors. However, each company has different factors and priorities at play that stakeholders must address along the way.

Interestingly, though, as with most commercial arrangements, value tends to be—but isn’t always—the primary priority or gating tool that drives the process.

The owner-manager’s team may seek to continue operating the company, but key investors wish to move on. The investor likely values price as a priority, while the management team will be less concerned about price and more concerned about the path forward.

Priorities are very specific to each company and each deal, and they will dictate the best option. There are five common priorities that companies need to address.

1. Timeline

One of the first assessments is timeline. Those with shorter-term concerns may be worried about the effect of a market correction. Are we in the 7th inning or extra innings at this point? Others will have the luxury to ride out any market corrections. Timeline considerations are compounded by differing priorities among the ownership group. For example, private shareholders who want to exit their investment will often have a different viewpoint on timeline than a management group.

2. Liquidity

A second priority to consider is liquidity and immediacy. Many private-capital owned or backed companies may prefer a sale as it permits the greater or immediate liquidity alternative. IPOs do not allow for an immediate full exit and also carry restrictions on future share sales. There can also be lock-up or standstill agreements that are unattractive to shareholders seeking a clean exit.

3. Controlling your destiny

The third priority relates to control and being a master of your own destiny. An IPO, for example, provides management greater autonomy, in contrast to working for another private equity firm partner or as a business unit of a larger organization. That is especially true if management is in it for the longer term.

4. Riding the upside

Fourth is whether riding the upside potential is an acceptable risk. Companies with a stronger management ownership base may prefer the IPO, as it gives them and their staff continued upside. The downside is that a market correction could wipe out the value of sponsors’ retained interests, options and employee share ownership incentives.

5. Succession planning

If it’s a family-owned private entity and succession to the next generation is imperative, then that will impact both how an IPO share class is structured as well as the type of sale that would be negotiated.


Running both processes in parallel preserves maximum optionality, creates a competitive marketplace to maximize valuation, permits clients to pivot with changing market conditions—all of which combine to produce the best chance of achieving the optimal deal.