For private equity houses seeking an exit from business they have invested in, an initial public offering (IPO) on either the Main Market or AIM is a long-established and well-worn exit route. Here we consider the recent trends in private equity-backed IPOs.
How many recent private equity-backed IPOs have there been?
After a few lean years at the turn of the decade, private equity-backed IPOs returned with a bang in 2014 as over 30 financial sponsor-backed companies came to market (either the Main Market or AIM) raising, between them, in the region of £10bn. Many of these raised primary funds to significantly pay down or eliminate leverage and therefore avoided some of the wider market criticism of previous cycles. In 2015, private equity-back IPOs raised the overwhelming majority of all IPO proceeds raised that year – at that point, the public markets were valuing businesses greater than trade or private equity. Since then, although activity has receded slightly from that high-water mark, over half of all recent IPOs have been private equity-backed and those IPOs have raised more than non-private equity-backed businesses. As the financial institutions still have significant cash to deploy, an IPO is still a very credible liquidity event, but we are seeing increasing dual-track processes in order to generate competitive tension in processes.
How do private equity-backed businesses perform post-IPO?
Not only do private equity-backed IPOs perform well at the time of floatation, they tend to out-perform their non-private equity-backed rivals post-floatation as well, with such companies trading significantly better as against offer price following IPO. Therefore, any shares held over in the business post-IPO can continue to increase ROI for the private equity house.
Full exit at IPO?
Since 2009, more than half of proceeds raised in private equity-backed IPOs have been raised by selling shareholders (to include, as well as private equity houses, founders and other early stage backers exiting at the same time) providing private equity houses with returns on their investment at this stage. However, private equity houses are not always able to achieve a full exit at IPO and, in return for the ability to capitalise on part of their investment, selling shareholders are usually obliged to entered into lock-up arrangements over the remainder of their holdings. The average period for such restrictions is usually in the region of 180 days post-IPO.