September 2014 Issue
Private equity (PE) backed IPOs rose to their highest ever level in the first half of 2014, according to data from the Centre for Management Buyout Research.
In the first half of 2014 the IPO has solidified its status as the PE industry’s exit strategy of choice. PE-backed groups across Europe in particular took advantage of London’s revived equity market, launching over 30 flotations worth around £26.7bn.
In mainland Europe, IPOs worth a total of $26.5bn were priced between the start of the year and 26 June, representing a significant jump from the $5.7bn recorded during in the same period in 2013. 2014’s figure also recorded a 123 percent rise compared with the same period in 2007, which was the second highest total ever reached, at $11.9bn.
Although the European market enjoyed a solid start to the year, the UK market accounted for the majority of European activity in H1. A number of UK-based businesses opted for IPOs, including discount retailer Poundland, which filed for a $1.24bn IPO through Credit Suisse and JPMorgan in March. Poundland’s IPO allowed the firm’s PE owner Warburg Pincus to exit its 2010 investment. The PE group acquired Poundland from Advent International in a deal believed to be worth in the region of £200m. Specialist pet retailer Pets at Home, backed by KKR, also launched a £1.2bn IPO in March.
These offerings, however, were not isolated incidents. A large number of other PE-backed firms in Europe and the UK also filed for IPOs in London. Some analysts have suggested that political sensitivity caused by the spectre of the looming UK general election may have played a role in encouraging firms to act sooner rather than later. June was the most productive month in terms of PE IPO exits, with 23 exits worth a combined value of €8.8bn. The number of PE groups seeking IPO exits in the first half of the year has provided a notable boost to the total value of all PE company exits. In H1 the value of PE exits in Europe reached €52.8bn, more than double that of new buyouts. Almost half of all European PE exits in H1 2014 took place in the UK.
“In the first half of 2014 the IPO has solidified its status as the PE industry’s exit strategy of choice.”
PE backed IPOs, however, have not been limited to the European market. Globally, PE firms have started shedding their assets. In the US, PE groups have increasingly turned to public markets in order to divest assets dating back to the time of the financial crisis. Indeed, US PE firms have been engaging public markets at their fastest pace in nearly a decade. Many of the biggest American PE groups are taking their portfolio companies to market with IPOs. In the first half of 2014, cumulative PE-backed IPO valuations reached a record level, climbing above $72bn for the first time.
This upswing in PE IPO activity can be attributed to many factors, not least the over abundance of dry powder building up at a variety of firms over the last six or seven years. The market is currently very receptive to public offerings, as many investors, both big and small, are in a position to start putting their cash to work. Furthermore, across the globe corporate balance sheets are becoming stronger, with money finding its way back into developed markets from emerging economies. It appears that the strengthening of balance sheets is likely to continue for some time to come.
Equally, a renewed hunt for yield by institutional investors is also having a major impact on PE IPOs. With interest rates persistently low, investors are shunning some of the safe-haven assets that were popular as the economic recovery began to take hold. More and more investors are rediscovering their appetite for riskier investments.
The resurgence of the PE IPO market has also been felt in other sectors. It has helped to elevate investment banking fees to pre-financial crisis levels. The rise in banking fees has been welcomed within the industry, which had previously experienced sluggish fee growth thanks to the relatively subdued M&A market. As a result of the IPO revival, global investment banking fees for H1 2014 rose 12 percent year on year, reaching $47.1bn. This figure is the biggest six month total since 2007. As noted, much of this growth was predicated on PE IPO activity. Fees paid to investment banks by private firms throughout the first half of the year rose 45 percent, or $5.8bn, compared with the same period last year.
As a consequence of the growing preference of firms for IPOs, the secondary buyout market has endured a difficult year to date. The secondary market contracted to its lowest level since 2008 in H1 with just €8.8bn of deals completed – 25 percent lower than during the same period last year.
Whether the IPO resurgence can continue remains to be seen, and some analysts have begun to suggest that the IPO window is already beginning to close. Trade sales may soon replace the IPO as the exit strategy du jour.
© Financier Worldwide
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Richard Summerfield