17th July 2010. This report, by the the Australian Private Equity and Venture Capital Association (AVCAL) examines how Australian Private Equity -backed IPOs perform relative to non-PE-backed IPOs. The evidence presented in this study suggests that, contrary to many anecdotal reports, PE-backed stocks do not consistently underperform compared to the non-PE-backed stocks, but in fact perform better, on average, over longer horizons.
A statistical analysis of initial public offerings (IPOs) shows that private equity backed IPOs have historically recorded higher average returns than non-private equity backed listings.
The study found that newly listed shares by private equity (PE) firms outperformed non-PE backed listings across all time horizons analysed from one day to three years after IPO listing, with average returns ranging from 4 per cent to 78 per cent across the different time scales compared to minus 2 per cent to 4 per cent for non-PE backed IPOs.
The results also showed that PE-backed IPOs’ outperformance tended to increase over time. The average share price of PE-backed stocks grew by 1.78 times over a three year period after listing compared to non-PE stocks which averaged 0.98 times their listing price. PE backed IPO average share prices were also higher after one day, one week, six months, one year and two years post listing.
The study, ‘An analysis of the performance of private equity-backed IPOs in Australia’, was peer-reviewed to validate the research methodology and findings. The study analysed all IPOs valued at $100m and above from 23 October 2003 to 8 Nov 2010. This period included 14 PE backed IPOs and 88 non-PE backed IPOs.
Over the seven-year period, the PE-backed index more than tripled from the base figure of 1,000 to 3,386 while the non-PE IPO index rose to 2,099. Both indices outperformed the S&P/ASX 200 Accumulation Index market benchmark which rose to 1,985 over the same period.
This analysis was also repeated using only the industry sectors which had both PE and non-PE IPOs, resulting in an even greater outperformance by PE backed IPOs. Over the entire seven-year period of the study, PE IPOs generated a compound annual growth rate of 19.03 per cent compared to just 0.52 per cent for non-PE IPOs