Following the setback of several high profile, private equity backed IPOs, one might be forgiven for thinking there is a high degree of risk behind the Private Equity (PE) model. After all, when one of said IPOs enters administration, such as Dick Smith, it’s not unusual for the businesses’ ownership history to be scrutinised.
Given these particular cases are strongly covered by the media, is there a misperception regarding the performance of PE-backed IPOs?
While detractors argue PE offerings like Myer (ASX: MYR) were a factor in the hiatus of the IPO market after 2011, there have also been standout performers. JB Hi-Fi (ASX: JBH), acquired by private equity in 2000 and floating on the ASX in 2003, has since accumulated 975% (excluding dividends).
Meanwhile, Deloitte’s annual IPO study concluded that in 2015, 3 of the top 20 performing listings for the year had links to private equity. These were BWX, BBN and APX – ending the year with respective gains of 138%, 70% and 230%. In addition, 13 out of 16 PE IPOs ended the year above their float price.
According to a study conducted by Rothschild and the Australian Private Equity and Venture Capital Association, which focused on $100m companies, the year’s results delivered a return of 13.1%. However, while impressive, the results lagged those of non-PE IPOs, which achieved a 19.3% return.
Looking further back, 2014 was not without its own success stories in APN Outdoor Group Ltd (ASX: APO) and iSentia Group Ltd (ASX: ISD). Their shares are trading 173% and 78% higher than their respective IPO prices.
But even after those triumphs, returns for PE floats in 2014 also trailed non-PE IPOs (6.6% vs 13.7% respectively). But when one considers 2013, often recognised as one of the best performing years for PE-backed IPOs, returns were significantly greater (19.6% vs 1.4%).
What may come as a surprise is that despite non-PE IPOs faring better in 2 of the last 3 years, PE floats actually outperformed their peers across the entire 3-year timeframe. The Rothschild study noted that investors who bought into PE IPOs from 2013-2015 were, on average, 15.4% ahead of their peers. In total, delivering average returns of 40.9% (or a weighted average return of 26.4%; 8% superior).
Additionally, during this period, PE-backed IPOs feature 8 times among the top 10 performing IPOs. The other prominent piece of research for this period, by Deloitte, suggests PE IPOs returned 47.6% (or 28.4% as a simple average) across the 3 years. This vastly outperformed the 13.9% return from the ASX 200.
It is certainly beneficial for PE owners to keep ‘skin in the game’, as opposed to selling down their stake and impeding the confidence of investors. However, companies such as APN, iSentia, oOh Media (ASX: OML) and Burson Auto Group (ASX: BAP) have defied this ‘hurdle’ – experiencing strong growth after escrow stock was sold.
Of course, businesses like Dick Smith and Spotless (ASX: SPO) are just some of those who suffered when their PE owners lightened their position. What this does indicate, is that while the release of escrow stock is a significant juncture for PE stocks, the subsequent market outcome isn’t a forgone conclusion.
One of the criticisms often levelled at PE-backed IPOs is that their owners are trying to turn around the company in a tight timeframe, on minimal investment. Accordingly, one should gauge the level of investment a PE owner has put into a business. Look at the length of PE ownership, as well as the corresponding financial statements during said period.
Examine the history of the PE owner, including the nature and performance of their investment portfolio. The strength of their connection with the business in question should help you establish how critical the PE firm is in helping the company operate.
There is an undertone of negative sentiment in the market towards PE IPOs. However, the above results suggest that many PE floats exceed their prevailing reputation. Meanwhile, an emphasis is instead placed on the ones that don’t.
As with any investment you make in the market, it’s important to distinguish the individual opportunity from performance averages and the like.
Ultimately, you should analyse each opportunity on a case by case basis before making an investment decision. Keep in mind that the size of the PE IPO won’t necessarily be a gauge as to how it will perform. What’s more, the past performance of one PE float should not dictate the future performance of another. And if it were an indicator, investors might just realise that PE IPO’s don’t necessarily trail the market, or their peers for that matter.
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