PE backed IPOs provide added value to the stock market

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1 Ratio PE IPOs / totaal IPOs Ratio PE IPOs / total IPOs provide added value to the stock market 1.1. Global PE backed IPO trends After a period of silence, the Dutch IPO market awoke in March 2012 after the successful IPO of Ziggo. The major shareholders of Ziggo, private equity (PE) firms Cinven and Warburg Pincus, utilized the opportunity to partly realize a return on their investment. PwC sees an upcoming trend in the number of PE deals in North-America, despite the not always immaculate reputation of PE firms. During 2011 and 2012 many companies have held back their planned IPO in the face of growing concerns over global economic growth, particularly in China, and the ongoing eurozone debt crisis. Table 1: Number of PE IPOs vs. total IPOs % % 2 Asia 11% 7% Global 27% 23% 26% Asia shows a downward trend in the number of compared to the total IPOs since 2008 accounted for 5 of the IPO market in ( ) Graph 1 and 2 provide an overview of the PE IPOs versus total IPOs ratio per year for, and Asia. In 2011 and 2012 the average ratio was higher compared to the previous years ( ) in, while and Asia show a decrease. Furthermore, the Asian PE IPOs merely account for a limited part of the total IPOs. Many IPO privatizations have occurred in recent years in Asia, which could explain the lower ratio of PE IPOs. However, the ratio in 2007 and 2008 is notable. While the other regions face a significant decrease, Asia shows a contrarian trend At IPO, a private equity portfolio company usually has a different capital structure than for example a family owned business. PE backed companies often have considerable volumes of debt, while other companies have a lower debt/equity ratio. Therefore a private equity firm is often perceived as an optimal return focused investor, who doesn t attribute value to long-term sustainability. However, private equity firms historically have also invested in companies in financial distress. In many cases, the companies have survived and were sold successfully. Graph 1: Number of compared to number of total IPOs per region with a deal value above 50 million ( ) Asia Graph 2: Deal value compared to deal value total IPOs per region with a deal value above 50 million ( ) Asia PwC 1

2 1.2. The PwC study The acquisition by a private equity firm is generally, wrongly, only associated with a considerable increase in debt, reorganizations and the disposal of business units. Investors could be reluctant, given the reputation of private equity firms, to participate in the IPO of a PE portfolio company. PwC has assessed whether this reluctance is justified. In the study of 3,329 IPOs 1, PwC has compared the performance of versus non PE backed IPOs in the, and Asia regions. PwC has tested the following hypothesis: Table 2: Breakdown of the sample Numberof IPOs IPOs (deal value > 50m) 4,949 Non operating companies -/- 1,207 Data unavailable -/- 156 Other regions -/- 363 Adjustment formultiple listings + 16 Total Sample 3,239 Region split 1, Asia 1,452 have a better share price performance compared to non after IPO In the PwC study with regard to IPOs in the previous ten years ( ), the IPOs are being compared based on the performance on and after the IPO date. The performance on the stock market is measured by the percentage change of the stock price compared to the offer price at IPO. This study has measured the performance at three points in time; after one day, one month and one year. The first two measurement points reflect the most pure performance, with a limited influence of (external) market conditions. The year-to-date performance as substitute for the one year performance is applied for IPOs after February 15 th, Source: Dealogic 2013 PwC 2

3 % change offer price % change offer price % change offer price 1.3. Performance of IPOs ( ) The study shows evidence that in on average perform similar compared to non on all measurement periods. Whereas PwC noticed a slight outperformance of on the first day and first month of trading, non PE backed IPOs have performed somewhat better at the one year performance point Graph 3: Average stock price performance of IPOs in 13.8% 13.7% % 22.7% 22.9% Non In consensus with, the PE backed IPOs in performed slightly better than non on the first day and first month of trading. Notable is however the outperformance after one year. The significantly outperform the non (17. versus 4.2%). The tremendous outperformance is shown across almost all industries. Therefore, PE backed IPOs in, on average, outperform non PE backed IPOs ( ) Asia The performance of versus non PE backed IPOs in Asia provides a totally different view. Non outperform the PE backed IPOs significantly at all measurement points. Most notable is the outperformance after one year (9.4% versus 1.). The disappointing performance of could among others be a result of the less developed private equity market in Asia Potential reasons for outperformance of 1 Graph 5: Average stock price performance of IPOs in Asia 25.3% 23.4% 20.3% 21.1% 1. Non 9.4% The ability of a PE firm to professionally manage a company. A relatively modest valuation at IPO, to enhance the success of an IPO. Private equity firms remaining a shareholder after IPO, which results in a sign of confidence to the market. Graph 4: Average stock price performance of IPOs in % 5.6% % 4.2% Non PwC 3

4 % change offer price 1.4. Performance of IPOs ( ) Recently, investors have been keen on participating in in and. The percentage of in the two regions has grown to 47% in 2011 and 2012 from 39% in The relative increase in number of has been received very well on the stock market. For 2011 and 2012, PwC noticed outperformance of on all points of measurement in and In 2011 and 2012 the ratio of versus non was on average higher than the previous period ( ). The most recent ( ) have been performing very well on the stock market. In fact, outperform non on all points of measurement in are not yet on the same level as pre-crisis. Despite the continuous economic uncertainty, have outperformed in 2011 and 2012, especially at the one year performance point Initial free float PwC s study shows a decrease in the initial free float at IPO. Companies decided to float less shares to the public in 2011 and 2012, compared to The initial free float in remains significantly lower than. Remarkably, in on average float more shares than non. In, the initial floatation is clearly lower for. Table 3: Initial free float at IPO PE backed 34% 24% non PE backed 38% 34% PE backed 5 4 non PE backed 39% 36% The decrease in percentage floatation for PE backed IPOs can be explained by the strategy of private equity firms to exit in multiple stages. This exit strategy is increasingly being applied, and could partially explain the performance of PE backed IPOs in 2011 and The market perceives a phased exit as positive, which is reflected in the stock price Graph: 6: Average stock price performance of recent IPOs in North America and (2011 and 2012) 12.2% 18.8% % 16.4% 3.9% 3.7% 2.6% 2.3% 28.1% 0.1% non PwC 4

5 % change offer price % change offer price 1.5. Private equity backed IPOs in the Netherlands and Germany Phased exits, which are widely applied in North America, have recently been successfully applied in the Netherlands and Germany. Examples of PE backed IPOs with a phased exit are: Brenntag en Kabel Deutschland in 2010, GSW Immobilien in 2011 and most recent Ziggo in Focus on Dutch and German PE IPOs PwC has observed the 30 in the Netherlands and Germany over de past ten years ( ). During this period, have outperformed the non at all points of measurement. Hence, have been well received on the Dutch and German stock market. The study on 30 in the Netherlands and Germany: 6 PE firms have preferred a full exit at IPO, while 24 PE firms remained shareholder after IPO 14 out of 24 PE firms have already sold all of their remaining shares 10 PE firms are still a shareholder Performance full exit at IPO vs. partial exit at IPO The graph below illustrates the differences in stock price performance after IPO. PE IPOs with a partial exit are clearly performing better than PE IPOs with a full exit by the PE firm(s). Graph 7: Performance of in the Netherlands and Germany ( ) Graph 8: Performance of in the Netherlands and Germany ( ) 12% 8% 6% 4% 2% 9.8% 4.7% 5.4% 4.1% % 7% 3% 1% -1% -3% 7.1% 5.3% % 1 day 1 month Non IPO Full exit IPO partial exit IPO exit strategies PwC has compared the different IPO exit strategies of PE firms in the Netherlands and Germany. In this study two types of exits are defined: Full exit at IPO and a partial exit at IPO. In the case of a full exit, the PE firm immediately floats all of the shares held by the PE firm. If a PE firm decides to hold shares after IPO, such an exit is considered to be a partial exit. PwC has measured the performance of these two types of IPOs at two points in time. The study merely applies two points of measurement due to the relatively small sample. The results after a year are highly influenced by market conditions. IPOs with a partial exit by the PE firm(s) performed significantly better. Hence, investors prefer to invest in a company which is still partly owned by private equity firms. The perception that a PE firm leaves a company heavily financed and stripped down on the market is often an underserved reproach. On the contrary, PE firms increasingly prefer a partial exit. This trend could very well continue in the near future. PwC 5

6 1.6. Methodology During the period ,949 2 companies have raised more than 50 million at IPO. In order to create a pure and comparable sample, only operational companies have been taken into account. Hence, the following type of companies have been excluded from the sample: Closed-end funds (430), Real Estate Investment Trusts, (280), Investment Managers (232), Special Purpose acquisition companies (119), Other Funds (63), Acquisition/Restructuring Companies (48), Oil & Gas Royalty Trusts (13), Other Trusts (12), Capital Pool Companies (7) and Special Purpose Vehicles (3). The sample of operational companies amounts to 3,742 companies. The comparison of merely operating companies provides a fair reflection of performance, rather than including non operating companies. Next, companies with missing data regarding share price information (90) and market value (66) have been excluded from the sample. As mentioned before, this study is scoped to the regions, and Asia. Hence, the regions Latin America (172), Middle East (82), Australasia (65) and Africa (42) have been excluded. Subsequently, the sample is adjusted for listings in multiple regions (16). The final sample amounts to a total of 3,239 IPOs in the regions, and Asia. 2 Source: Dealogic (2013) PwC 6