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Private equity-backed IPOs outperform market, says Cass Business School report

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A report commissioned jointly by the British Private Equity and Venture Capital Association and the London Stock Exchange and conducted by London’s Cass Business School provides new eviden

A report commissioned jointly by the British Private Equity and Venture Capital Association and the London Stock Exchange and conducted by London’s Cass Business School provides new evidence of the strong performance of private equity-backed IPOs, the sponsors say.

The report, covering the period between January 1995 and December 2006, indicates that private equity-backed initial public offerings outperformed other IPOs by more than 9 per cent a year after their public listing and outperformed the FTSE All Share Index by 20 per cent over the same period.

The report found that venture capital-backed IPO firms typically spend up to five times as much on R&D as their non-private equity-backed counterparts at the time of flotation, while on average private equity-backed IPO firms undertake twice as much capital expenditure in relation to total assets as non-private equity-backed companies.

‘This research provides more evidence of the way in which private equity is good at building better businesses by growing value,’ says BVCA chief executive Simon Walker. ‘The figures on spending on R&D and capital investment underline the big contribution that private equity and venture capital make to creating both businesses and an economy that are more innovative.’

The report says private equity-backed IPOs account for more than 50 per cent of the total number of companies in the consumer services, industrials, healthcare and technology sectors in the Main Market of the London Stock Exchange. The majority of venture capital-backed IPOs are in the health and technology sectors.

Of 1,735 IPOs on the London Stock Exchange Main and AIM markets between 1995 and 2006, private equity-backed IPOs accounted for 22 per cent of the number of IPOs and 27 per cent – or GBP18.9bn – of the aggregate capital volume raised.

The report also found that the average length of time a private equity firm invests in a company before flotation is 4.5 years for venture-capital-backed IPOs and 3.8 years for private equity-backed IPOs, and that IPOs in the Main Market perform relatively better than their AIM counterparts.

Firms typically hold an average of 33.2 per cent in venture capital-backed IPOs and 59.2 per cent in private equity-backed IPOs just before flotation, falling after flotation to 19.8 per cent and 28.5 per cent respectively. This demonstrates, the sponsors say, the continuing involvement of the original investors in the business.

‘The study shows significant aftermarket performance for private equity-backed IPOs,’ says the report’s author, Cass Business School professor Mario Levis. ‘Such IPOs are more profitable, they are run more efficiently, and they invest more in both physical assets and R&D than their non-private equity backed-counterparts. Investors will increasingly look for such attributes in companies seeking a public listing under the challenging current market conditions.’

Nick Langford, head of UK business development for equity primary markets at the London Stock Exchange, says: ‘These findings underline the importance of the complementary relationship between private equity and venture capital and our markets. In particular, the success of AIM has provided a choice of exit routes catering to companies of different sizes and sectors and at different stages in their development.’

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