New Cass research shows private equity-backed IPOs outperform market

Research published by Cass Business School provides new evidence on the strong performance of private equity-backed IPOs.

The report was commissioned jointly by the British Private Equity and Venture Capital Association and the London Stock Exchange, and covers the period January 1995 to December 2006. Key findings include:

private equity-backed IPOs outperform other IPOs by more than 9% one year after their public listing

they also outperform the FTSE ALL Share Index by 20% over the same period

venture capital-backed IPOs typically spend up to five times as much on R&D as their non private equity-backed counterparts at the time of flotation

typical private equity-backed IPOs spend twice as much on capital expenditure in relation to total assets as non private equity-backed companies.

Commenting on these findings, Simon Walker, Chief Executive of the BVCA, said:

‘This research provides more evidence of the way in which private equity is good at building better businesses by growing value. The figures on spending on R&D and capital investment underline the big contribution that private equity and venture capital make to creating both businesses and an economy that are more innovative.’

The report also shows that:

private equity-backed IPOs account for more than 50% of the total number of companies in the consumer services, industrials, healthcare and technology sectors in the Main market.

The majority of venture capital-backed IPOs are in the health and technology sectors out of 1,735 IPOs on the London Stock Exchange Main and AIM markets between 1995 and 2006, private equity-backed IPOs accounted for 22% of the number of IPOs and 27% – or £18.9 billion – of the total sum raised the average length of time a private equity firm invests in a company before flotation is 4.5 years for venture-capital-backed IPOs and 3.8 years for PE-backed IPOs

IPOs in the Main market perform relatively better than their AIM counterparts the PE firm typically holds an average of 33.2% in venture capital-backed IPOs and 59.2% in PE-backed IPOs just before flotation. Immediately after flotation, these holdings are at 19.8% and 28.5% respectively, showing the continuing involvement that the original investors have in the business.

Professor Mario Levis, author of the Report, said:

‘The study shows significant aftermarket performance for private equity-backed IPOs. Such IPOs are more profitable, they are run more efficiently and they invest more in both physical assets and R&D than their non-private equity backed-counterparts. Investors will increasingly look for such attributes in companies seeking a public listing under the challenging current market conditions.’

Nick Langford, Head of UK Business Development for Equity Primary Markets at the London Stock Exchange, said:

‘These findings underline the importance of the complementary relationship between private equity and venture capital and our markets. In particular, the success of AIM has provided a choice of exit routes catering to companies of different sizes and sectors and at different stages in their development.’