PE firms tap IPOs as M&A exit market remains challenging

Private equity firms are increasingly looking to public markets to exit portfolio companies as a shortage of strategic buyers continues to constrain traditional M&A routes, according to a report by the Wall Street Journal.

An IPO has historically been viewed as a secondary exit option for sponsors, which generally prefer a private sale that can provide a cleaner and faster route to returning capital to limited partners. But the reopening of the US IPO market is making listings a more attractive alternative, particularly for firms under pressure to generate distributions.

The broader IPO market has regained momentum in 2026, with investor appetite particularly strong for businesses linked to artificial intelligence, aerospace and defence. Several private equity-backed companies have also reached the public markets, including restaurant chain Jersey Mike’s, fashion brand Reformation and data-centre operator Csquare.

There were 21 US-listed IPOs involving private equity-backed companies through 5 August, according to Dealogic. That already exceeds the 20 recorded during the whole of 2025 and represents the highest annual pace since 2021.

The resurgence is giving sponsors another potential route to liquidity at a time when traditional exits remain difficult to execute.

For sponsors, however, an IPO does not necessarily mean an immediate exit. Lock-up agreements typically prevent major shareholders from selling for at least six months following a listing, while some sponsors can take years to fully reduce their stakes.

Madison Dearborn Partners provides one example of a sponsor switching from a private sale to an IPO. The firm took defence contractor Aevex Aerospace public in April at a valuation of more than $2bn after efforts to find a private buyer failed. Madison Dearborn had owned the company since 2020 and had reportedly begun seeking bids in 2023.

Public listings also expose sponsors to stock-market volatility. Jersey Mike’s, which was taken public by Blackstone after roughly 18 months of majority ownership, fell 6% on its first trading day in New York.

Despite the improving IPO environment, private sales remain the preferred outcome for many private equity firms where a suitable buyer can be found.

US public listings accounted for only about 1% of private equity exits since the beginning of 2022, based on exit data from Jay Ritter, director of the University of Florida’s IPO initiative.

The increased use of IPOs is also part of a broader expansion in the range of liquidity tools available to sponsors and their investors. Continuation vehicles, GP-led secondary transactions, fund-to-fund transfers and other structured solutions are being used alongside traditional M&A and public offerings to generate distributions.

IPOs are often pursued as part of dual-track processes, with sponsors preparing for a listing while simultaneously seeking private buyers. Running both processes can provide flexibility and, in some cases, strengthen a sponsor’s negotiating position with potential acquirers.

For private equity firms, the revival of public markets therefore offers an important additional exit valve rather than a wholesale shift away from M&A.

The experience of Brookfield-backed Clarios illustrates the risks. The automotive battery maker abandoned plans for a US listing after initially filing in 2021, citing market volatility, and instead raised billions of dollars of debt to fund distributions to its owners.

With exit pressures mounting across the industry, however, sponsors are likely to keep IPOs firmly on the table for portfolio companies that are sufficiently mature and can command investor interest.