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Study: IPOs prove more viable exit strategy

Despite a more favourable outlook for IPOs in both the US and Europe, US companies may soon report ‘disappointing earnings’ while uncertainty in Europe will keep deal volumes at low levels, according to Swiss advisory firm SCM.

Strengthening public markets will make initial public offerings “a more realistic exit route” for private equity firms, according to a recent study from Swiss investment advisory firm Strategic Capital Management.

In both the US and abroad, recent IPOs such as The Blackstone Group’s exits of SeaWorld and Pinnacle Foods, plus the IPO of motor insurer Esure, backed by UK groups Penta Capital and Electra Partners, point toward an increasingly favourable market for public offerings.

“The first half of the year has seen IPOs of financial sponsor-owned companies both in the US and Europe, more recently Kion Group, a maker of forklifts backed by KKR and Goldman Sachs, in Germany,” vice president at SCM Andreas Maier told Private Equity International. “The volume of secondary stock offerings by private equity-backed public companies has also risen in the last few months.”

Despite a run up in public markets in the US, there is a risk that profits have “peaked” and that US companies might “witness disappointing earnings”, the study said, negatively impacting the overall investment environment for private equity firms. Sales growth and EBITDA growth at US companies, while still positive, decreased for four consecutive quarters as of the end of March, according to the study.

“What’s really striking is the difference between the US and Europe. In the US there are many aspects that remind us of the bull markets pre-financial crisis,” Maier said. “If you look at the issuance of debt – and I think that’s a main driver in the market there – the high availability of debt has led to quite aggressive transaction structures, whereas in Europe the deal environment is rather difficult due to the general uncertainty in the market. There were relatively few transactions in 2012, but at high valuations.”

While firms such as Apax and Advent have “scaled back” operations in Southern Europe and focused on other European regions, deal activity in countries such as Italy is on the rise, according to the study. Recent private equity transactions include CVC’s €1.1 billion acquisition of credit business Cerved, Charterhouse’s €320 million buyout of pharmaceutical company Doc Generici and The Carlyle Group’s €212 million investment in motor producer Marelli Motori.