HCA's share price has dropped 30 percent, wiping $5.37 billion from its market capitalisation, since the hospital group's record-breaking initial public offering.
The company, backed by Kohlberg Kravis Roberts, Bain Capital, Bank of America’s private equity unit and the founding Frist family, raised $3.79 billion when it priced at $30 per share. But after peaking at $35.17 per share, HCA's share price tumbled following a 25 July earnings call, plummeting to $24.76 at market closing 3 August.
HCA is not the only newly public private equity-backed company that has suffered from a falling share price this year however, opening the industry to questions about the amount of value left in companies brought to market by private equity firms.
Perhaps most spectacular is the example of Danish jewellery group Pandora, which lost more than 70 percent of its value post-IPO, after a profits warning earlier this week sent its share price into freefall. Its private equity backer, Nordic firm Axcel, made a return of 30x on the float.
But have private equity firms simply been guilty of timing the market well, with subsequent post-IPO performance affected by market factors beyond sponsors' control?
In HCA's case, healthcare regulations have played a part, according to analysts and the company's senior management team.
“While the company had favorable admissions growth during the quarter, we experienced a shift in service mix from more complex surgical cases to less acute medical cases. This resulted in lower than anticipated revenue growth and earnings,” HCA chairman and chief executive officer Richard Bracken said in a statement.
HCA received strong support in the build-up to its IPO after undergoing significant operational turnaround. As of 31 December, the company’s EBITDA had jumped from $4.4 billion in 2008 to $5.4 billion.
In his March report on HCA’s IPO, Morningstar analyst Michael Waterhouse said: “Although patient volume should increase, we expect slower Medicare reimbursement growth will subdue HCA’s revenue growth. The Patient Protection and Affordable Care Act of 2010 will temper the Medicare reimbursement growth.”
PPACA, which instituted a number of sweeping healthcare reforms intended to drive down costs and add an estimated 30 million Americans to the healthcare system, may have contributed to slowing Medicare and Medicaid reimbursement rates, payments that account for 40 percent of the HCA’s “patient volume”, according to its public filing. Since 2010, HCA’s adjusted EBITDA fell to $1.42 billion compared to about $1.5 billion in the prior year period, according to the company’s most recent earnings report.
“It was really the first glimpse of how the affordable care act is going to play out for hospitals, and I think it spooked a lot of people,” Waterhouse told Private Equity International. “They were really the first hospital to report, and I think the market may have been caught a little off-guard that hospitals would have a much harder time than they originally expected for patient reimbursements.”
Not all private equity-backed IPOs have performed poorly however.
One example is Nielsen Holdings, a television ratings and research company backed by KKR, Thomas H. Lee Partners, The Carlyle Group and The Blackstone Group. After pricing in January at $23 per share, its share price by close of trading on 3 August had risen to $29.11.
Globally, private equity-backed IPOs have generated the highest proceeds since 2007, according to Ernst & Young’s second quarter report. IPOs have raised $17.2 billion in proceeds, with twice as many listings than in the first quarter.
US IPO deal volume appears to be returning to normal after suffering in 2009 and the first half of 2010. However, the resumption of activity has not necessarily translated to stellar performance – average one month returns for IPOs priced in 2011 have slipped to 7.8 percent as of 27 July, well below the 10.3 percent average from 2001 to 2010, according to data provided by Dealogic.