{"id":42502,"date":"2023-10-20T15:21:40","date_gmt":"2023-10-20T15:21:40","guid":{"rendered":"http:\/\/startupsmart.test\/2023\/10\/20\/seven-ways-to-tell-whether-a-private-equity-backed-ipo-should-be-avoided-startupsmart\/"},"modified":"2023-10-20T15:21:40","modified_gmt":"2023-10-20T15:21:40","slug":"seven-ways-to-tell-whether-a-private-equity-backed-ipo-should-be-avoided-startupsmart","status":"publish","type":"post","link":"https:\/\/www.startupsmart.com.au\/uncategorized\/seven-ways-to-tell-whether-a-private-equity-backed-ipo-should-be-avoided-startupsmart\/","title":{"rendered":"Seven ways to tell whether a private equity-backed IPO should be avoided – StartupSmart"},"content":{"rendered":"
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By Mark Humphery-Jenner<\/em><\/p>\n
Private equity-backed IPOs have come under significant scrutiny following several high-profile failures: but are these representative or merely anomalous blights on an otherwise well-performing sector?<\/p>\n
Last week, the proposed private-equity backed listing of Guvera music was blocked by the ASX following concerns raised by the Australian Shareholders Association over its business model and valuation based on earnings.<\/p>\n
Guvera were looking to raise $100 million in an IPO that valued the business at more than $1.3 billion, despite the fact that it lost $81 million last financial year on revenue of just $1.2 million. The move by the ASX follows Guvera re-issuing its prospectus after scrutiny from ASIC.<\/p>\n
Another notorious PE-backed IPO was the 2012 float of Dick Smith, backed by Anchorage Capital. It ended in significant losses for initial investors and was dubbed by Forager Funds Management analyst Matt Ryan as \u201cone of the great heists of all time\u201d.<\/p>\n
The high-profile the IPO of Myer, backed by TPG Capital, also performed poorly: Myer listed at $4.10 per share, fell to $3.75 per share on the first day of trade, and fell to $1.20 per share by the end of 2015.<\/p>\n
However, several other PE-backed IPOs have performed strongly between 2013 and 2015, including Aconex, Ooh! Media and Mantra group. This raises the question of whether the average PE-backed IPO underperformance and what factors might investors look out for.<\/p>\n
Do PE-backed IPOs necessarily underperform?<\/h3>\n
So should investors make a rule to avoid PE-backed IPOs in general? In fact, there is little evidence that PE-backed or VC-backed IPOs underperform for investors. In Australia, from 1994 to 2005, the difference between VC\/PE backed IPOs and other IPOs is not statistically significant.<\/p>\n
The Australian Venture Capital Association Limited (AVCAL) in conjunction with Rothschild reports that while non-PE backed IPOs did perform better in 2015 than did PE backed ones, PE-backed IPOs outperformed from 2013-2015. AVCAL argues that \u201cPE-backed IPOs strongly outperform non-PE backed IPOs after the first year of listing\u201d, with PE-backed IPOs outperforming non-PE backed IPOs by 23% during that one year after listing.<\/p>\n
Similarly, Deloitte argues that \u201cthe performance of private equity backed listings suggests results are far more positive than market sentiment reflects\u201d and that $1 invested in each PE-backed IPO since the beginning of 2013 would yield an average return of 48% by the end of 2015.<\/p>\n
Using the set of ASX listings for at least A$100 million reported by AVCAL (and their classification of whether a firm is PE-backed), we can look at the average value of $1 invested in each of the PE-backed IPOs versus $1 invested in each of the non-PE backed IPOs.<\/p>\n
When doing so, to avoid the possibility of outlying PE-backed firms experiencing super-positive returns and this biasing the results, the daily return is winsorized (limiting of extreme values) and any return over 100% is excluded (this adjustment actually biases in favor of the non-PE backed IPOs).<\/p>\n
The below graph, which is consistent with that produced in the AVCAL report, demonstrates that PE-backed IPOs outperform their non-PE backed counterparts. A similar trend appears over longer two-year and three-year time horizons (though, more recent IPOs will not yet have had the opportunity to accrue such a lengthy return history).<\/p>\n