Companies that had once been owned by private equity (PE) investors are clearly outperforming their competitors on the stock exchange. A total of nearly 250 former PE-backed companies have gone public in Europe since 2009. The share value of these companies has since improved by about 50%, whereas the share value of other newcomers to the stock exchange was up by 44%.
Such is the finding of a study by auditing and consulting firm PwC, which analysed more than 600 European initial public offerings (IPOs) since 2009. According to the study, the share value of the 243 former PE-backed companies has improved by 49.6% since their respective IPO. By contrast, the share value of the other 364 companies rose by 44.4%.
“Private equity funds have focussed more on building sustainable businesses,” explains Remco van Daal, responsible for PwC Europe’s PE practice. “We see a much more long-term approach and also more investments in the portfolio companies. That is reflected in real increases in value, which naturally benefit the new owners as well.”
It is worth noting that it takes a little time for many former PE-backed companies to outperform the other stock exchange newcomers in terms of their value increase. On average, their share price had gone up around 5.7% one month after their IPO, while by the same time the share price of the other market newcomers had reached about 9.0%. After six months (11.6% versus 13.7%) and twelve months (16.9% versus 20.9%), the PE-backed companies were lagging behind the other companies. But in the second and third years the situation began to change. “In my opinion that demonstrates two things,” says Jan-Willem de Groot, Capital Markets expert at PwC. “On the one hand, companies previously backed by private equity investors had a lot of substance and, they typically invest in more mature businesses.”
Private equity firms are frequently already thinking about their exit when they invest in a company and make a targeted effort to prepare the company for that moment. “Private equity managers tend to have a good understanding of what institutional investors look for in a company, what qualities are important to them, and what data and information they need in order to get a good idea of the future development potential of the IPO candidate,” according to Jan-Willem de Groot.
The British payment service provider Worldpay (issue proceeds: 3.35 billion euros), the Danish wind energy company Dong (2.65 billion euros) and the British online market place Auto Traders Group (2.23 billion euros) have ranked top among the biggest private PE-backed IPOs since 2009. Based on the number of listings, the most active financial investors were CVC and Nordic Capital, which had each brought eleven of their portfolio companies onto the stock exchange floor. Bain Capital, EQT and Apax were next in line with eight public offerings. In general, only IPOs with issue proceeds of at least 50 million euros were considered in the study.
As the PwC evaluation shows, 54% of the IPO proceeds went to the PE funds and 46% to the companies itself. Most of them, in turn, used the money to pay back debts (37%) or for ‘general purposes’ (33%). It was far less common to put the proceeds towards expansion (7%), to use it as working capital (7%), or to spend it on investments (2%) or research and development (2%).
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