AFTER all too many lean years, it is with much relief that investor appetite has finally returned to the IPO market, particularly here in London.
We can speculate as to the reasons why – whether its cause is a spate of viable companies coming to market or the ephemeral notion of market confidence returning. It is, of course, both of these. A good company is necessary for a successful listing. But as the last few years have demonstrated, without a growing economy and a wider atmosphere of investor bullishness, this may not be sufficient. Similarly, market confidence alone is not enough to woo investors if the fundamentals of the business on offer are not sound. And with many companies coming to market, investors can afford to be discerning.
Many investors have long-term growth horizons, so they will have to take a broad view when sizing up prospective opportunities. They will look at the narrative of the business, the so-called “equity story” and ask: where has it come from and where is it going? Is it a yield story or a growth story? They will size up the management team and assess whether they are the right people to deliver on the promises in the prospectus. And, of course, the all-important question in an age of cynicism is “why now?”. This framework is imposed on any IPO prospect coming to market by the investment community and, if the answers do not pass muster, capital will go elsewhere.
However, recent commentary suggests that offerings born from private equity are – and should be – treated differently by investors. But there is no reason why they should be and indeed scant evidence that they are. To convince the buy-side to invest, a private equity offering has to do all the things to woo investors that any other listing would do. Investors will look under the bonnet at the capital structure just as they will appraise the track record of the chief executive. Private equity doesn’t expect a free pass, but nor should it be treated with suspicion.
Fortunately, despite the current narrative, it isn’t. Investors are adopting an air of neutrality in private equity IPOs, and those that are looking beyond first day froth are, more often than not, being rewarded. Since the pick-up in the market (beginning in March 2013), of 44 private equity offerings, 30 are in positive territory, some significantly so. This is because, once the frenzy disperses and we have moved past a business’s ability to weather herd mentalities and whimsical hedge funds on day one of trading, we are left with the same important questions of whether targets are being hit, dividends paid and strategies implemented.
Across a wide range of sectors, from HellermannTyton in manufacturing, Countrywide in property, or Merlin in entertainment, businesses once owned by private equity are continuing to deliver on the fundamentals established by their former backers, demonstrating market leadership in their fields, expanding their operations and, of course, rewarding investors.
Simon Horner is director of policy and public affairs at the British Private Equity and Venture Capital Association.