According to academic studies, IPOs by Private equity-backed companies in the UK and Germany outperformed the stock market and other IPOs. Given the poor performance of some high-profile IPOs, such as Debenhams and Jessops, these findings have come as a contradiction. What remains uncertain is whether the performance of private equity-backed IPOs reflects better management by buyout firms or a tendency for only the most successful buyouts to end in a flotation. Comparatively, investors buying an equal share in every IPO of a private equity-backed company since 1990 and selling after 3 years would have clocked 3.3 times the FT All-Share index, according to a Citigroup-backed UK study.

The report was commissioned by Terra Firma, the buyout firm. Authors, Christian von Drathen and Flaviano Faleiro at London Business School, said: “Criticism of LBO-backed IPOs is largely unwarranted”. PE-backed IPOs produced average annual returns of 18.4% in the first three years compared with 11.9% for other IPOs, the report says. Meanwhile, a Deutsche Bank-sponsored German study, covering 138 private equity-backed IPOs, found these produced an average 12.1 per cent, which is more than 3 times the CDAX index. The 3 factors that made an IPO of a PE-backed company more likely to outperform the stock market: the size of stake retained by the private equity owners; the amount of AUM; and the time between buyout and flotation. What did not matter much, was the amount of debt owed by a company and the size of management’s stake. The authors said their findings raised the question whether buyout firms could “demand higher exit valuations and improve ... investment performance” because of their superior IPO record.

 

 

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