Rush to get to the front of the IPO queue

Private equity listings are like London buses. There are none for what seems like an eternity, then 10 come along all at once.

The market in Europe accelerated in the second half of last year when US investors began to pile into the region’s equities, using private equity IPOs as an ideal way to get exposure.

Since then, it has been one deal after another as investors, particularly in the US, began directing capital back to Europe after cutting their exposure to the region at the height of the eurozone crisis. Poundland and ISS are two companies that have announced listings in recent days.

“It’s the busiest time since the reopening of the IPO window in Europe in the second half of 2012,” said Gareth McCartney, head of European equity syndicate at UBS.

US institutional investors have added about $100bn in European equities in the 12 months to November, while cumulative flows by European investors into equities have risen to €120bn over the same period, according to research by Goldman Sachs analyst Peter Oppenheimer.

Because IPOs typically offer a discount to already listed comparable companies, they can often be one of the cheapest ways for investors to bet on the European recovery.

US fund management groups, including BlackRock, the world’s largest money manager, have been some of the biggest buyers of IPO listings, according to bankers.

Investors point to the improving macro environment, where clouds had shrouded the region’s stock markets in the years since the financial crisis are starting to clear. They also say that asset managers, who are continuing to rotate from bonds to stocks, are finding relative value in Europe after the US markets soared in 2013.

Nick Williams, head of Emea equity capital markets at Credit Suisse, says: “Investors are taking the view that in the medium-term it’s a good time to be investing in certain economies within Europe.”

Mr Williams adds that the interest is strong in the UK in particular, where recent optimism about economic conditions is encouraging some companies to come to equity capital markets pitching their businesses as a play on the UK recovery.

The deluge of IPOs is also being fuelled by the robust after-market performance of recent flotations. the 170 IPOs from European issuers over the past year have risen by an average of 8.9 per cent on day one, by 18.2 per cent after one month and by 24.8 per cent overall, according to data from Dealogic.

There has been particular interest in flotations from the retail sector – including value propositions, internet-related companies and traditional high street names.

But investors need to be wary. Some traditional fund management groups, such as Aberdeen Asset Management and M & G Investments, rarely buy private equity listed offerings.

I am not against private equity in general, but when it comes to IPOs they are in the business to get the highest price for their investors. This means there is a tendency to flatter the books to make the investment look a lot better than it is

“I am not against private equity in general, but when it comes to IPOs they are in the business to get the highest price for their investors,” said James Laing, deputy head of pan-European equities at Aberdeen Asset Management. “This means there is a tendency to flatter the books to make the investment look a lot better than it is,” he added.

Predictably, bankers involved in listings, disagree. “Private equity groups have a lot of potential assets to come to market. This should ensure that pricing remains sensible,” Mr McCartney of UBS said.

For London, Debenhams has long been the byword for why investors should be cautious about signing up for IPOs from private equity hands. The department store group was floated in May 2006 after two-and-a half years of private equity ownership. But its return to the public markets has been marked by regular profit warnings and a share price that for the past seven years has resolutely stayed below the 195p offer price.

Towards the smaller end of the scale, Promethean World, which makes interactive whiteboards and used to be owned by Apax Partners, has lost more than 80 per cent of its value since it floated in March 2010.

Southern Cross, the care home operator once owned by US buyout group Blackstone, also showed how institutional investors could come unstuck. The group was floated in London in 2006, two years after Blackstone had acquired it, but collapsed in the summer of 2011, brought down by a combination of rent increases and revenue declines.

In another stark example, Myers Holdings, the Australian department store group floated in 2009 by US private equity firms TPG Capital and Blum Capital has never traded above its A$4.10 offer price. Few private equity firms have sought public market exits in Australia since then.

David Vaughan, IPO leader at EY, says: “Will there be some companies who try it on? Probably, so long as markets are buoyant. But I don’t think there should be an assumption that all the companies coming now are of lower quality.”

However, he warns that it will not take much to halt the IPO bandwagon, if one or two deals are poorly priced and then do badly. Mr McCartney agrees. “We need to keep an eye on the quality of the companies looking to float but at the moment, we are in a good place, quality remains high,” he said.

Reporting by David Oakley, Anne-Sylvaine Chassany, Andrew Bolger, Alison Smith, Arash Massoudi