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What started as a low rumble is turning into a roar. Private equity funds, sick of sitting on their investments for years with little hope of an exit, see the pick-up in equity markets as the cue for an IPO boom. Esure, Seaworld, Pinnacle Foods and Moleskine have been floated by PE funds this year. According to Preqin data, 18 more PE backed companies have filed for an IPO, with a total value of $5-billion (U.S.).
So if a salesman knocks on your door peddling his PE-backed wares, what should you do? The tempting answer is to leave him on the doorstep. These IPOs are about existing investors cashing in, not new money for growth. The companies will have already been analysed, geared up and "optimised" to within an inch of their lives. What is left for new investors?
Possibly quite a lot. A study of 1,500 IPOs by Mario Levis of Cass Business School found that, while the average IPO underperformed the FTSE All-share by 13 per cent over the next three years, those backed by PE funds outperformed by a similar amount. Larger PE-backed IPOs outperformed by even more, as did those where the fund retains a significant stake. And while they come to the market with more debt, this falls away rapidly – from an average of 46 per cent of assets just before the float to 20 per cent after three years. Finally, margins tend to be high and stable while those for average IPOs are lower and falling.
PE firms seem to be learning the lesson, particularly when it comes to retaining an interest. Blackstone, for example, still owns more than 60 per cent of both Pinnacle and Seaworld. And investors have been comfortable with the pricing. Seaworld, Esure and Taylor Morrison all floated at the top of the range. Still, it will not take much for sentiment to sour. It is hardly encouraging that Moleskine, only a month after its IPO, is 15 per cent below its float price.