UK PE-backed companies outperform the FTSE

Simon Walker, the BVCA chief executive, said the industry body’s research counteracts common perceptions that private equity pursues “quick flips” and does not invest in companies.

Private equity-backed initial public offerings in the UK outperform the FTSE All Share index by 20 percent in their first year of listing, according to the latest research.

Simon Walker:
demonstrating
buyout firm
investment

In the eleven years to December 2006 £18.9 billion was raised on the main London Stock Exchange market and on Aim from IPOs by private equity-backed companies, according to the data from the British Private Equity and Venture Capital Association and Cass Business School. This is equivalent to 27 percent of the value raised from all flotations on the UK exchanges during the period.

Buyout-backed companies took a mean of 3.8 years until flotation, and a median of 3 years, while venture-backed companies took a mean of 4.5 years and a median of 4 years. Buyout-backed companies also received a mean of £18.9 million in research and development pre-IPO and a median of £1.0 million prior to flotation, against a non-private equity-backed mean of £1.6 million capital expenditure and a median of £0.3 million. Venture-backed firms received a mean of £2.9 million in R&D and a median of £1.4 million.

Simon Walker, the chief executive of the BVCA, said the length of time and investment contradicted the popular conception that buyout firms pursue so-called “quick flips” and do not invest in companies.

The results also showed that buyout-backed companies make a return for investors in the year post-IPO of 20 percent on an equal-weighted basis, an average of the percentage change in value of individual portfolio companies, and 11.7 percent on a value-weighted basis, measuring the average change in overall value of the companies. This was against a return of 11 percent and 3.7 percent for non private equity-backed companies on the respective bases.  

The average returns contrast with certain bellwether deals which have been seized on by private equity’s critics. These deals include Debenhams, the UK department store, a consortium-backed deal, which was upon IPO the most profitable UK private equity buyout in history. It has struggled on the public markets and its share price had fallen to £0.63 per share yesterday, or nearly a third of its 2006 IPO price. 

Walker said: “If the company in question is a household name amongst the chattering classes, like Debenhams was, then you have a problem there… We’re absolutely not saying private equity is the magic bullet for everything.” He said the results overall showed improvement by private equity, but individual deals could still go wrong on the public markets.

In the year of the Debenhams IPO first year private equity-backed flotations fell by 7.49 percent on a value-weighted basis and were up 9.84 percent on a equal-weighted basis, in contrast to 2005 where they were up 24.84 percent and 17.57 percent respectively.

The BVCA’s research also shows UK venture-backed companies have had a difficult experience on the public markets. Venture capital-backed flotations fell on average by 7.2 percent on an equal-weighted basis and 39.3 percent on a value-weighted basis in the year post-IPO.

We’d love government to be more supportive [of venture].

Simon Walker

Walker said: “I’m not going to hide data because it doesn’t tell a great story about a particular sector. There are real issues that need to be addressed in venture and the focus has been so much on buyouts in terms of public attention.

“We’d love government to be more supportive in that regard. Everyone says venture is a good idea but there isn’t the backing there is in the US.”