The first half of 2013 has been very positive for Mishcon de Reya's flotation and corporate finance practice with the successful closure of two AIM admissions and a strong pipeline for AIM and main market IPOs. Both of our H1 IPOs saw a private equity house achieve a partial exit from portfolio companies.
HAS THE IPO MARKET OPENED UP AGAIN FOR PRIVATE EQUITY BACKED BUSINESSES?
Yes: we believe that it has.
Prior to 2013, the IPO market had effectively been closed for many companies. In addition to general market conditions affecting all IPO candidates, institutional investors felt somewhat bruised that many private equity backed companies that had come to market during the boom years had been overly burdened with debt. In fact, many public market investors with funds to invest instructed banks and brokers not to show them any private equity businesses.
In the last 6 months, these attitudes have softened. In addition to our involvement with the successful IPOs of Digital Globe Services and IBEX Global Solutions, 2013 has also seen the exit by ECI from Bargain Booze through an IPO on AIM and today's oversubscribed IPO of Foxtons by BC Partners. These deals suggest that the market for private equity backed IPOs has re-opened. What's more, companies connected to the housing market such as Countrywide and CREST Nicholson have also returned to the public markets following a period of ownership by private equity houses.
CAN PE HOUSES OBTAIN A COMPLETE EXIT THROUGH IPO?
Institutional investors remain instinctively nervous when PE houses attempt to make a complete exit. As part of the IPO process, banks and brokers will often require existing shareholders to retain an interest post IPO and for that interest to be the subject of a lock up. This is particularly the case for high growth businesses. There will often be a tension between the institutional investor's desire to ensure that the issuer can operate independently of the interests of the private equity shareholder while at the same time ensuring that the interests of public and private shareholders are aligned.
The IPO of Bargain Booze was structured as a complete exit by ECI, however the discount alcohol retailer went to IPO with a dividend yield of nearly 8 per cent and a six times ratio of earnings before interest and tax. This indicates that not only was the deal priced conservatively, but that the public markets were willing to allow the private equity house to walk free of the business because it promised a high yield, rather than a high risk, growth strategy.
HOW TO DECIDE WHETHER AN IPO ROUTE IS APPROPRIATE?
Before starting down the road of a potential IPO (which can take at least 2 to 3 months), the private equity owners of a business must first have a strong idea that the market will accept the business and they are likely to achieve an adequate valuation. In our opinion, the IPO bull market is not sufficiently self-assured to provide an exit for riskier high growth and pre-profit companies but there are now signs that well managed and profitable companies will be welcomed back to the public arena. In addition to considering a trade or secondary sale, PE houses should consider whether the IPO exit route is a worthwhile option.