Private Equity IPOs. The 2017 inside story

Transcription

1 Private Equity IPOs The 2017 inside story March 2018

2 21 private equity IPOs Private equity backed IPOs raised 3.1 billion Private equity backed IPOs represented 40% of all new money raised in IPOs 2 of the 3 most valuable IPOs were private equity backed Foreword Once again we are pleased to present our annual report covering the key trends emerging from flotations of private equity backed companies on the London markets (both the Main Market and AIM) in Overall there were more IPOs on the London Stock Exchange in 2017 than in Despite this higher level of activity, the amount of new money raised was broadly the same. The number of private equity portfolio companies coming to the public markets was higher at 21 (16 in 2016) and the IPOs of ContourGlobal and TI Fluid Systems (each backed by private equity) were two of the three most valuable stock market debuts by market capitalisation during the year, with each of them valued at more than 1 billion. Overall, private equity backed IPOs raised 3.1 billion on listing comprising exit proceeds to private equity houses and management teams, and new money for the companies themselves to fund future growth. This is more than double the amount raised in private equity IPOs in 2016, and represents 40% of all new money raised in IPOs on the London markets in had a sluggish start following on from a depleted number of listings in Most of the large floats happened in the second half of 2017 and this was true for the private equity backed cohort as well, with the largest of those coming to market in Q4. However, the largest AIM flotation of the year, the private equity backed Eddie Stobart Logistics, debuted in April with a market capitalisation of more than 570 million, showing that not all of the action was back-ended.

3 Private Equity IPOs: The 2017 inside story 03 Despite the strong showing in the second half of the year, the markets seemed to hit a saturation point in late October into November when four Main Market IPOs were pulled subsequent to having declared publicly an intention to float. Volatility and general IPO market conditions were cited as reasons for the changes of heart, although one listing, the IPO of prepared food manufacturer Bakkavor, priced its IPO only six days after saying it was off, but only after reducing its valuation by a third. Two of those aborted floats were private equity backed companies: Cabot Credit Management backed by Encore Capital Group and JC Flowers, and TMF Group backed by DH Private Equity Partners. Cabot blamed the market conditions on its decision to terminate its IPO and has since showed no sign of re-announcing an intention to float. The TMF float would have been one of the largest private equity backed IPOs of the year; DH eventually ended its dual track process by selling out in a private sale to CVC Capital Partners for 1.75 billion.

4 04 The 2018 outlook for IPOs generally and IPOs of private equity backed companies in particular is good but time is of the essence for companies that have been considering a flotation. In 2016, as the referendum on EU membership neared, IPO candidates moved to hit an execution window in the early summer. We are likely to see a similar trend this year as companies seek to float in the early summer before the typically less busy late summer period which, in 2018, will be followed by a fourth quarter in which investors are likely to be nervous in the face of Brexit, the terms of which are expected to be put in front of European parliaments for ratification as early as October. Market sentiment in the first half of 2019 is also likely to be affected by Brexit. In 2018 so far, the US IPO market had its best January since 1996, reversing a concern there that public ownership was losing its lustre for many businesses; and what happens in the States usually ripples across the pond is also likely to be the year in which CVC Capital Partners exits its majority ownership of Sky Bet having reportedly hired bankers in January to commence its IPO process. Reports suggest a valuation for Sky Bet of between 2.5 billion and 3 billion, which, when compared to this year s statistics, would make it the largest private equity backed flotation by some margin. Further down the valuation scale activity levels are high; for example it has been reported that CBPE is preparing investee company JTC Group for a 320 million flotation. Once again our research demonstrates that an IPO can constitute a very successful exit for private equity investors and deliver high-quality companies into public ownership, a trend which we expect to continue.

5 Private Equity IPOs: The 2017 inside story 05 Contents 02 Executive summary How good is it as an exit? 04 What is it going to cost? 05 What is the deal for management? 06 Sectors 07 Pinsent Masons Corporate Finance Practice

6 02 Executive summary 06 In 2017 there were 69 IPOs on the London Stock Exchange (2016: 60) of which 24 (35%) were on the Main Market and 45 (65%) were on AIM. The initial market capitalisation of 2017 s Main Market IPOs ranged from 1 million to 6 billion and on AIM from 7.5 million to 705 million. Headline IPO numbers 21 Of these IPOs, our study identified eight Main Market IPOs and 13 AIM IPOs as being private equity backed. Since we began compiling data for these studies in 2013, there has been a continuing movement away from the Main Market as the dominant market by volume for private equity flotations. In 2013 to 2015, being the period covered by our inaugural report, 74% of private equity backed IPOs were on the Main Market. In 2016 we saw an exactly even distribution across the two markets whereas this year s cohort is weighted 62% to AIM and 38% to the Main Market. Private Equity IPO choice of market for listing % % % 16 62% % Key: PE backed IPOs Other IPOs Key: 74% AIM Main Market

7 Private Equity IPOs: The 2017 inside story 07 Potentially more significant than volume is value. In 2017 private equity houses grossed higher exit proceeds as selling shareholders on AIM flotations ( 597 million) against those on the Main Market ( 506 million). This is a consequence of the greater number of AIM floats, including a 271 million sell-down on AIM s biggest IPO of the year (Eddie Stobart Logistics), and the fact that in three of the largest private equity IPOs on the Main Market the private equity sponsor either sold down nothing or only a small proportion. Largest PE Float 1.68 billion 18.1 million Viridion Growth Fund Smallest PE Float

8 08 On closer analysis, the reasons for these low sell-down numbers on the Main Market were specific to the companies in question: Reservoir Capital Group sold down only 10% in the IPO of ContourGlobal, reflecting Reservoir s flexible investment approach which is suited to an infrastructure-heavy energy sector business; Oaktree Capital Management listed newly-formed Irish housebuilder, Glenveagh Properties, thereby equitizing its land bank of 14 conditionally acquired development sites in the Greater Dublin Area; and Bain Capital achieved a listing of fluid storage company, TI Fluid Systems, without selling down equity having cancelled its IPO in October 2016 citing volatile market conditions. Total money raised 4 billion 3.1 billion billion 1.3 billion In compiling this report, we excluded from the overall listing statistics a total of 29 IPOs of special purpose acquisition companies, REITS and listed funds. These companies are not comparable to the private equity backed portfolio companies which are the focus of this report since they are not trading businesses. We operate a broad classification of private equity : we do not require a majority stake or specify a minimum or maximum hold period to classify an investor as private equity and therefore include venture capital and growth funds. We do not, however, include hedge funds, debt funds or patient capital, as each of those investor classes views itself as performing a different function to private equity. We also exclude introductions to the market, whether they be initial listings, secondary listings or step ups (or downs) from other markets where there is no associated fundraise. This is because the principal purpose of this report is to review how, and how much, private equity and management teams raise on an IPO exit, and so we wish to compare those IPOs against an appropriate benchmark of non-private equity backed businesses which come to market at the same time. Key: PE backed IPOs Other IPOs

9 Private Equity IPOs: The 2017 inside story 03 How good is it as an exit? 09 There is no typical hold period prior to an exit by IPO. Of the private equity backed companies coming to market in 2016 and 2017, three (in 2016) and four (in 2017) had been through one or more secondary buyouts prior to the IPO. Of the private equity backed IPOs in 2016 and 2017, the longest hold period from the date of the primary or last secondary buyout was over 12 years (158 months) and the shortest was only 13 months. The median hold period for the IPOs in 2016 was 74 months but only 42 months in This reflects the mix of private equity investments where venture capital typically has a longer hold period before exit than later stage private equity investment. It is also strong evidence that private equity investors are there for the long haul before exposing their investee companies to the public markets. For those with the right equity story and who get their market timing right an IPO can provide an expeditious exit. Of the IPOs we surveyed in 2016 and 2017, 16 came to market less than five years after the incumbent private equity investor had invested, and 10 of those 16 came to market in less than three years from initial investment. Holding Periods Months Held (Median)

10 Private equity investors achieved a 100% exit in four of the 2017 IPOs (2016: none). Of these four exits only one was on the Main Market: CBPE s 100% sell-down of Xafinity. This is only the second occasion since 2013 in which there has been a complete exit by private equity at the time of listing on the Main Market. In another good result for CBPE in 2017, it sold down 85% in the Main Market listing of Medica Group, exceeding the largest Main Market sell-down by private equity in The sell-down proportions on the remaining private equity backed Main Market IPOs were all below 50%. In six (46%) of the private equity backed AIM IPOs, private equity investors sold down in excess of 50% at IPO. The sell-down distribution this year is more polarised than in previous years with 24% (five IPOs) achieving an 80% to 100% sell-down and 48% (10 IPOs) selling down between zero and 19%. This is attributable in part to six IPOs on AIM of venture capital or growth fund backed companies which came to market to create liquidity and as a venue to provide access to future growth capital. 10 Sell-down statistics (%) by PE Main Market 100% 85% 47% 20% 11% 10% 0% 0%

11 Private Equity IPOs: The 2017 inside story AIM 100% 100% % 61% Funds advised by 60% 51% 35% 16% 15% 0% 0% 0% 0% Golden Sun Emerging Funds

12 12 The remaining IPOs with a low (or no) sell-down were on the Main Market and each was particular to its circumstances. For example: Reservoir Capital Group was a founding shareholder in the global wholesale power generating company ContourGlobal in ContourGlobal has particular expertise in renewable power generation (wind, solar, hydro and thermal), making it more suited to a long-term investment. Reservoir Capital Group has a flexible investment approach and has been able to operate as a long-hold infrastructure investor on this investment; it sold down 10% on IPO. Bain Capital achieved the flotation of TI Fluid Systems, an IPO which had been aborted in October It did this without selling down any shares, but the company did use approximately $200 million of the IPO proceeds to pay down 51% of its senior private notes which had been issued in connection with the acquisition by Bain. There was little change this year to lock-up terms - where private equity houses which retain a stake following IPO are prohibited for a period from selling down. A six month lock-up remains the most common as seen in 65% of private equity backed IPOs (2016: 60%). Some private equity investors were forced to accept longer lock-ups of 12 months (35% this year compared to 40% in 2016). With the exception of one IPO, the 12 month lock-up periods were all on AIM. Lock-up: 6% 29% 40% % 60% Key: 6 months 12 months 24 months

13 Private Equity IPOs: The 2017 inside story Orderly market provisions for private equity were more prevalent this year. This is an additional period of time following the end of the lock-up period in which the shareholder may dispose of shares only through the company s retained broker so as to smooth out the sell-down and maintain an orderly market in the company s shares. In 2016, half of the private equity backed IPOs had no orderly market period for the private equity house. In 2017 this was down to 24%. The length of orderly market provisions range from six to 12 months and in all but one case was the same length of time as the applicable lock-up. 13 Orderly market: 12% 24% 31% 29% % 35% 19% Key: None 6 months 12 months 24 months

14 14 Private equity will seek to sell-down its retained stake in a listed company over time. The usual structure deployed is to sell-down in large tranches by accelerated bookbuilds (known as ABBs ). ABBs are share placings brokered by investment banks on behalf of the selling shareholder for which they charge a commission. ABBs are an effective way of disposing of large positions which could not be sold in the market under normal trading conditions Example PE sell-downs over time Forterra plc (LoneStar) 64.3% 53.3% Key: Forterra plc (LoneStar) On the Beach Group plc (Inflexion) Ascential plc (Apax Partners) Ramsdens Holdings plc (NorthEdge) In reviewing companies covered by our previous years studies, we have seen that private equity is generally able to sell-down to below 3% (the lowest disclosable interest under the Disclosure Guidance and Transparency Rules) within two years of the IPO. In 65% (or 23 out of 35) of the private equity backed IPOs from 2015 and 2016, the private equity house has now exited in full using one or more ABBs. The ABBs carried out for private equity sellers in companies which listed in 2016 and 2017 were done at an average increase of 24% to the IPO price. That increase in value is in addition to any dividends paid in the period between the IPO and the ABB. PE % stake in company On the Beach Group PLC (Inflexion) 37.1% 35% Ascential (Apax Partners) 29% Ramsdens Holdings PLC 24.9% 14.4% 29.5% 23.5% 11.8% Months from IPO

15 Private Equity IPOs: The 2017 inside story 15 Where a shareholder retains a significant stake following completion of an ABB, it is usual to enter into a further lock-up period. In the majority of the ABBs we have surveyed, that lock-up period was 90 days. ABBs are largely the preserve of Main Market listings, with just two of 32 ABBs surveyed having been completed on AIM. Both of these AIM ABBs resulted in a total sell-down by the private equity investor in a single ABB. Where private equity sells out in more than one tranche, the typical gap between tranches is between 120 and 150 days (i.e. during the one to two months following the lock-up period typically imposed after the previous ABB). ABB during lock-up period It is possible to secure a waiver of a lock-up to allow an early ABB following an IPO. We saw this with ConvaTec in 2016 and with Ten Entertainment Group in 2017 where strong share price performance and demand in the secondary market gave investment banks confidence to waive the lock-up to permit a significant sell-down in the months following the IPO. 163 days after IPO 149 days after IPO

16 16 04 What is it going to cost? In an IPO the company and, where applicable, selling shareholders will pay a sales commission to the banks running the IPO order book (typically called the bookrunners ). The commission is usually a percentage of the gross proceeds raised for the company and the selling shareholder. In the private equity backed IPOs on the Main Market, the bookrunner commission for selling shareholders ranged from 2% to 3.5% and in each case was the same as the commission paid by the company. PE selling shareholder commission range Main Market AIM 2% - 3.5% 2.5% - 4% Again this year we have seen reticence to disclose selling shareholder commission on AIM IPOs. The commission was disclosed in only four (of nine) AIM IPOs where private equity sold down and ranged from 2.5% to 4%. The AIM Rules do not require disclosure of selling shareholder costs as they are not a cost to the company and so do not dilute IPO proceeds. In the 2013 to 2016 period we have seen commissions on AIM IPOs reach as high as 5%.

17 Private Equity IPOs: The 2017 inside story 17 A new trend, this year is the lack of disclosure of company commissions on some AIM IPOs. Four of the private equity backed AIM IPOs in 2017 did not disclose the amount of commission or corporate finance fee paid by the company to the broker. They did, however, comply with the AIM Rules in publishing a total figure for the company s estimated expenses of the offer. This lack of disclosure means it is becoming more difficult to say what is market for broker fees on AIM IPOs. However, this has not yet led to an increase in the appointment of independent advisers on AIM private equity backed IPOs. In 2017, only five IPOs (of the 69 in total) named an independent adviser and each of those listed on the Main Market. In 2016 there were 11 IPOs (of the 60 in total) with independent advisers mandated, including four on AIM. Independent Financial Advisers appointed on all IPOs Of the five IPOs in 2017 with independent advisers, three were private equity backed and constituted three of the top 10 IPOs of the year by market capitalisation. It appears therefore, for now, that only the largest IPOs have room in the budget for the appointment of an independent adviser Key: IFA appointed IFA not appointed

18 18 05 What is the deal for management? In 17 of the 21 private equity backed IPOs management sold shares on IPO. There were no cases of management making a total exit (2016: also none). 137 million was raised in total for management shareholders on IPO. This is a significant decrease from 2016 ( 286 million). However, the 2016 figure was significantly impacted by the large sell-down of the founder stake in CMC Markets IPO ( 168 million). Total money raised by management on exit 268 million million Note: CMC markets raised 168 million for management in 2016.

19 Private Equity IPOs: The 2017 inside story 19 In much the same way as private equity backs management teams, to be a good IPO candidate a company requires good managers and management will be central to pre-ipo investor roadshows. Accordingly, key members of the management team will be required to lock-up their equity post-ipo to give investors confidence that management s interests continue to be aligned with the company s. In the vast majority of the IPOs studied, management shares were subject to a 12 month lock-up period. Lock-up: Orderly market: 5% % 5% 5% Key: None 6 months 12 months 24 months 10% 33% % 5%

20 20 It is usual for companies to put executive share schemes in place at IPO and this was the case in all of the private equity backed IPOs in The ability to reward management with the allotment of listed equity under perfomance-linked share plans is one of the main benefits of a public listing. Non-executive directors: 1 x annual director fees Executive directors: 2 or 3 x annual base salary Where participating as selling shareholder: fees/salary multiple plus proceeds of sale Management will be required to give business-related warranties to the investment banks under the placing/ underwriting agreement. The warranty exposure of a manager is comparable to that in an investment agreement. Although the details of these terms are rarely disclosed, in our experience the following warranty limitations are the market norm:

21 Private Equity IPOs: The 2017 inside story 06 Sectors 21 Both the Main Market and AIM are broad churches in terms of the sectors in which the companies listed operate. In 2017, the top three sectors by volume of private equity backed IPOs were financials (seven), consumer goods and services (six), and industrials (four). The sector distribution of the private equity backed IPOs mirrors the market generally, where the same three sectors featured the greatest number of total 2017 IPOs: financials (18), consumer goods and services (16), and industrials (16). These three sectors were also the most active by number of IPOs in our studies in 2013 to However, the largest private equity backed IPO of 2017 was the energy sector player ContourGlobal, with an initial market capitalisation of 1.68 billion IPOs by sector (all IPOs/PE backed) IPOs by sector (all IPOs/PE backed) Sector All PE Financials 18 7 Sector All PE Financials Consumer Goods & Services 16 6 Consumer Goods & Services Industrials 16 4 Industrials 60 22

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23 Private Equity IPOs: The 2017 inside story 07 Pinsent Masons Corporate Finance Practice We are the No.3 law firm by number of London Stock Exchange listed companies, the No.1 law firm by number of AIM companies, and the No.1 law firm by number of Technology, Oil & Gas, and Industrials clients according to Adviser Rankings (November 2017). Our Corporate Finance practice advises Main Market and AIM listed companies as well as investment banks and other intermediaries active in the public markets. Examples of the breadth of our practice include advising on IPOs, secondary fundraisings and public and private mergers and acquisitions. Having a market leading roster of listed company clients, we also provide business critical advice on Corporate Governance, the Listing Rules, the AIM Rules, the DGTRs, the Prospectus Rules, the City Code on Takeovers and Mergers and the market abuse regime. The standing of our international Private Equity practice was recognised in 2017 with an award for being the M&A Team of the Year (British Legal Awards) and by being ranked in the top five for numbers of deals completed (The Lawyer) and in Tier 1 of Private Equity law firms (Legal 500). To find out more about our team, other specialist reports, or to sign-up for legal updates, please visit Rosalie Chadwick Partner, Head of Corporate Finance T: M: E: rosalie.chadwick@pinsentmasons.com Edward Stead Partner, Head of Private Equity T: M: E: edward.stead@pinsentmasons.com 23

24 This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word partner, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use Pinsent Masons to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to Pinsent Masons is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. Pinsent Masons LLP For a full list of our locations around the globe please visit our websites: and