Buyout IPOs beat the market – eventually

An initial public offering on the stock market is often regarded as the
crowning glory for a private equity-backed company, giving the investment fund a
high profile exit, while allowing the company itself to capture the limelight of
business press coverage.

But what happens after that? The British Private Equity and Venture Capital
Association (which has the truncated acronym
BVCA)
and the London Stock Exchange (LSE) commissioned the Cass Private Equity Centre
at Cass Business School to find out.

Over the 12-year period from 1995 to 2006, there were 1,735 IPOs in London,
raising a total of £70bn on the main LSE market and on Aim. Private
equity-backed IPOs accounted for 382 of that total, or 22%, and a larger
proportion of the money raised ­ almost £19bn, or 27%.

The more interesting story is what happened after that. The research
differentiates between the performance of (i) private equity-backed buyouts and
(ii) venture capital-backed companies (VCs) and then compares both these groups
with the performance of the rest of the market, non-private equity-backed IPOs
(NPEs).

Surprisingly, perhaps, the NPEs performed on average better than either of
the PE-backed sub-groups on the first day of trading following an IPO. Indeed,
NPEs continue to generate superior returns (compared to the issue price) for the
best part of a year. After 12 months, however, PE-backed buyouts delivered 20%
returns on average, compared with 11% for NPEs.

VCs, on the other hand, provided disappointing returns, averaging a 7% fall
over the year.
These figures are ‘unweighted’ for the market capitalisation of the companies.
Taking market values into consideration changes the magnitude of the
performance. VCs are the top performers if looking at day-one price movements,
but by the end of the year they have fallen away sharply, to almost minus 40%.

The performance of buyouts is more pedestrian, trailing that of NPEs for the
most part, until near the end of the year when they deliver almost 12% compared
with just under 4% for the rest of the market.

Part of the explanation for the performance of VCs lies in the dotcom bubble.
Many of the worst performing shares during the period under review were
VC-backed technology stocks that went crazy immediately after they IPO’d, but
faltered or failed thereafter.