Friday Letter: Not so fast

Statements about the relative appeal of private equity-backed IPOs are often too sweeping

Fresh research has just been released on private equity-backed IPOs and their performance, this time in Australia.

As perennials go, this one’s pretty hardy: on the whole and as a group, do companies that list on a stock market after a period of private equity ownership perform better, or worse, than companies that have not? A web search will return any number of studies on the subject. The evidence, alas, appears still inconclusive.

The latest set of numbers, from the Australian Private Equity & Venture Capital Association (AVCAL) in association with investment bank Rothschild, makes the case that buying into sponsor-led offerings is generally a good idea. AVCAL looked at 49 businesses that listed on the ASX in 2013 and 2014 and found that the 23 deals that came with private equity involvement outperformed the 26 that didn’t – by 3 percent on average, and 4 percent on weighted average.

So far, so good. But before you call your broker and instruct them to buy private equity IPOs wherever and whenever they can find them, some more research will not go amiss.

In December 2013, global consulting group EY said private equity-sponsored public offerings worldwide that year were underperforming non-sponsored ones by 4 percent. Six months later, in June of last year, Financial News crunched numbers from Dealogic and found that in the first 30 days of trading, 60 private equity portfolio businesses that had gone public since the beginning of 2012 had gained 4.9 percent on average, whereas 106 non-sponsored listings had risen by 10.7 percent.

There are plenty more papers and research notes to consider if you wish, but it’s worth pointing out that taking just the three examples cited, we’re already comparing apples and oranges – different geographies, different moments in the IPO cycle, and the time periods over which performance is being measured aren’t the same either. Take in more of the research that has been produced so far, and the picture is certain to get a lot more complicated – and in places contradictory – still.

So maybe this question of whether or not sponsor-led IPOs are a superior buy for investors just doesn’t have a straightforward answer to it. Granted, it would be nice to be able to state categorically that companies that list after a period of private equity ownership are stronger, faster growing and hence a good public market buy but perhaps it's never going to be as simple as that. And it will take a much larger data set and a significantly longer time horizon for any reliable conclusions to reveal themselves. By which time, and at that level, most buyers and sellers will shrug and say that the findings are not specific enough to apply to particular markets, periods or companies.

“The results confirm the enduring value that private equity firms bring to the businesses they invest in,” said AVCAL chief executive Yasser El-Ansary in his press release this week. As tempting as this sounds, given the limited scope of the underlying data it is almost certainly premature – especially when you consider that if AVCAL’s sample had contained 2014 ASX listings only, its message would have been different. Because last year, for reasons not explained in this week’s announcement, the private equity-backed transactions in Australia actually under-performed their counterparts.

The question of whether private equity investors exit their companies at a high or a mid (or even a low) point remains moot. AVCAL and Rothschild have said they will continue to accumulate relevant data. They should, as should others, but don't expect one truth to reveal itself soon.