Private equity backed IPOs superior for shareholders
22 June 2011
A statistical analysis of initial public offerings (IPOs) shows that private equity backed IPOs have historically recorded higher average returns than non-private equity backed listings.
The study by the Australian Private Equity and Venture Capital Association (AVCAL) found that newly listed shares by private equity (PE) firms outperformed non-PE backed listings across all time horizons analysed from one day to three years after IPO listing, with average returns ranging from 4 per cent to 78 per cent across the different time scales compared to minus 2 per cent to 4 per cent for non-PE backed IPOs.
The results also showed that PE-backed IPOs’ outperformance tended to increase over time. The average share price of PE-backed stocks grew by 1.78 times over a three year period after listing compared to non-PE stocks which averaged 0.98 times their listing price. PE backed IPO average share prices were also higher after one day, one week, six months, one year and two years post listing.
AVCAL CEO Dr Katherine Woodthorpe said that the research disproves the notion that PE backed IPOs consistently underperform compared to non-PE backed stocks.
“There has been a misguided view in some quarters that private equity investment doesn’t have a long term benefit to investors beyond the PE ownership period,” she said.
“This study clearly demonstrates that PE backed IPOs brought superior returns on average than non-PE backed IPOs even up to three years after listing. In fact, PE backed IPOs outperformed more, on average, over longer time horizons.”
Dr Woodthorpe said PE backed companies have cited factors such as rigorous strategic oversight and governance, speed of decision making and the freedom for senior management to concentrate on operational performance as some of the key benefits of PE ownership.
“Private equity develops governance systems and processes within companies to prepare them for the rigours they face entering a public market environment. These factors become culturally embedded in the organisations and are to the benefit of subsequent owners.”
The study, ‘An analysis of the performance of private equity-backed IPOs in Australia’, was peer-reviewed to validate the research methodology and findings.
The study analysed all IPOs valued at $100m and above from 23 October 2003 to 8 Nov 2010. This period included 14 PE backed IPOs and 88 non-PE backed IPOs.
To validate the robustness of the results, alternative time periods were analysed, as well as the possible distortionary effects of a small number of extreme performers on the average returns. The study also used various weighting, index and sector-matching measures to obtain more balanced comparisons.
For example, the analysis included the construction of weighted indices to compare the concurrent performances of PE and non-PE-backed IPOs over time.
Over the seven-year period, the PE-backed index more than tripled from the base figure of 1,000 to 3,386 while the non-PE IPO index rose to 2,099. Both indices outperformed the S&P/ASX 200 Accumulation Index market benchmark which rose to 1,985 over the same period.
This analysis was also repeated using only the industry sectors which had both PE and non-PE IPOs, resulting in an even greater outperformance by PE backed IPOs. Over the entire seven-year period of the study, PE IPOs generated a compound annual growth rate of 19.03 per cent compared to just 0.52 per cent for non-PE IPOs
Click here for the report.
Examples of PE-Backed IPOs
For case studies of various PE-backed IPOs such as Seek and Bradken, please see the AVCAL publication ‘Value capital – the evolution of venture capital and private equity in Australia’.
Stuart Snell Ph +61 (0)2 8243 7001, (0)416 650 906, firstname.lastname@example.org
Author: Adrian O’Shannessy, Director, Greenwoods & Herbert Smith Freehills
Author: Dr Kar Mei Tang, Head of Policy and Research, AVCAL