Private equity IPOs trump market average

Private equity-backed IPOs beat the Standard & Poor's 500 stock index by an average of 7% in the first half of 2010.

Private equity-backed IPO deals are outperforming their non-private equity-backed counterparts when compared to the Standard & Poor's 500, according to Ipreo, a provider of data and analysis on capital markets. 

Over the past five years, private equity and non-private equity-backed IPOs on average have outperformed the market by 17 percent and 10 percent respectively, the research said.

Additionally, IPOs of companies owned by private-equity firms beat the Standard & Poor's 500 stock index by an average of 7 percent in the first half of 2010.

Ipreo’s methodology involved tracking the share price of each IPO from its first day of listing to its closing price at the end of the second quarter of this year.

One natural advantage private equity-backed offerings have is the fact managers have getting the best price as their ultimate goal.

William Charnley

Leading the trend has been the successful flotation of New Oriental Education & Technology, a provider of private educational services in China, which posted a 554 percent outperformance of the S&P stock-index. Since its 2006 debut, its shares have nearly quadrupled in value from $26.40 to $98.05 at the press time.

The data suggests companies coming to market backed by private equity owners exhibit certain competitive advantages.

“One natural advantage private equity-backed offerings have is the fact managers have getting the best price as their ultimate goal. Entrepreneurs left to their own devices can sometimes attach a value-reducing sense of sentimental value to a deal; it can hurt their bottom-line,’’ said William Charnley, a partner at law firm Mayer Brown, in an interview with PEO.

A private equity firm also typically explores several different routes to exit when seeking the best price. The firm’s underlying network of contacts and pre-existing relationships make available a number of buyers who can compete for the sale.

Private equity managers also frequently use a twin-track approach when making an exit, a simultaneous assessment of different ways to liquidate a holding. Charnley explained, Suffice to say general partners have available to them a few options including secondary deals, a trade-buyer transaction or an IPO. GP’s have cumulated enough experience to know when an IPO will provide them with the right valuation.’’