There will in all likelihood be fewer PE-backed IPOs in the US than in any year since 2010—but activity is on the rise the past six months. The median post-valuation for PE-backed IPOs is nearing record levels. And about half the capital raised in the 18 PE-backed IPOs conducted through the end of September was raked in by just three companies: US Foods, Patheon and Red Rock Resorts.
All that according to our 2016 US PE & VC IPO Trends report—hot off the virtual presses—which offers a full breakdown of the year’s ebbs and flows in the activity of privately held companies transitioning to the public markets, including IPO counts, dollar amounts and sector-by-sector analysis.
What the report doesn’t cover, though, is what’s happened once the stock of these companies has started trading. How has the market responded? Comparing IPO price with a stock’s current value can tell us something (or at least provide a snapshot view) about whether PE firms and their representatives are over- or underpricing their offerings and whether PE ownership prepared the companies for future success.
Here’s a chart of 19 PE-backed IPOs completed in the US by American companies since the start of this year—adding some more data through mid-October to our report’s purview and removing companies that went public overseas. We’ll use October 31 as a cutoff point for our data, in part to remove some of the more recent election-related noise in the markets. Below, we’ll offer some analysis of what you might be able to glean from the numbers.
[drizzle]Probably the biggest takeaway is that 15 of the 19 companies above have seen their stock increase since going public—and two of the four exceptions, GMS and US Foods, have declined by less than 2% (and now, as of November 11, are back in the black). By and large, the value of these companies has risen after they went public.
To what degree? Add it up, and you get an average per-share stock price increase of $3.75 per company, equivalent to 20% growth. Phrased differently, it would have cost an investor $355.50 to buy one share of each company at its IPO price, and that investor’s portfolio would have been worth $426.79 at the end of October. Add a few zeros to those figures and the returns get impressive.
Compare that against the S&P 500, which registered growth of just 4.3% from the start of the year until October 31. This year, at least, it would have been far more lucrative to simply buy stock in every PE-backed company that went public.
Why? One possible reason is that, thanks to a generally chilled market, it took an exceptionally strong company to navigate its way to an IPO during 2016—perhaps the businesses that in a normal year would have posted disappointing returns once going public simply never got that far. Or maybe PE backers and their investment banks, concerned about the unfriendly conditions, consistently underestimated the attractiveness of their companies and thus underpriced their IPOs. More likely is some combination of the two—plus, surely, a handful of other factors.
Other than their prior backing by private equity firms, there are few obvious similarities between the companies that have found the most financial success on the stock markets. Of the six whose stock prices have risen 40% or more, three are in the B2B sector, but all do very different things: Cotiviti is a provider of accounting services, while SiteOne Landscape Supplies is a manufacturer of outdoor products and TPI Composites makes blades for windmills. The largest trend in the group of successful companies may be some tie to finance. Stock exchange operator BATS Global Markets and insurance business Kinsale Capital Group join Cotiviti in exceeding 50% growth since going public.
After just 16 IPOs in the first three quarters of the year, PE-backed companies have undertaken eight offerings since the start of October. With the window slowly opening and more and more companies hitting the markets, it will be both interesting and revealing to whether the sterling rate of returns keeps up.
For more data and analysis on PE-backed IPOs in the US, get the full report for free.
Article by Kevin Dowd, PitchBook