Rosalie Chadwick: Flotations backed by private equity are bouyant
These findings are contained in a Pinsent Masons special report Private Equity IPOs – The 2017 Inside Story, which examines the trends in private equity-backed IPOs over the last five years. There has been a resurgence of private equity-backed IPOs after the barren period in 2011/12 with 104 private equity-backed companies listing on the London markets over this period. The increase demonstrates that an IPO can constitute a very successful exit for private equity investors and deliver high-quality companies into public ownership – a trend which we expect to continue.
The research shows that only 38 of the private equity-backed IPOs were on the main market and 62 per cent were on Aim. We have analysed private equity IPOs since 2013 and one of the key trends has been a significant increase in the number of mid-market private equity houses exiting through an IPO, which correlates with the surge in private equity IPOs on Aim. In 2013-2015, 74 per cent of private equity-backed IPOs were on the main market and 26 per cent were on Aim, an almost complete reversal over the piece.
There were 69 IPOs of trading businesses on the London Stock Exchange in 2017, after 60 in 2016, with the two largest private equity-backed IPOs being ContourGlobal and TI Fluid Systems, which were also two of the three largest stock market debuts, having initial market capitalisations of £1.67bn and £1.17bn respectively.
There was a sluggish start to 2017 with most of the large floats happening in Q3-Q4, and this was also true for the private equity-backed cohort, with the largest coming to market in Q4. However, the largest Aim flotation of the year, the private equity-backed Eddie Stobart Logistics, debuted in April with a market capitalisation of more than £570m, showing that not all the action was back-ended.
Despite the strong showing in the second half of the year, the markets seemed to hit a saturation point in Q4 when four main market IPOs were pulled after declaring an intention to float, citing volatility and general “IPO market conditions”. Two of those aborted floats were private equity-backed companies – Cabot Credit Management, backed by Encore Capital Group and JC Flowers, and TMF Group backed by DH Private Equity Partners. Cabot has since showed no sign of reannouncing an intention to float. The TMF listing would have been one of the largest private equity-backed IPOs of the year, however DH eventually ended its dual track process by selling out in a €1.75bn private sale to CVC Capital Partners.
The 2018 outlook for London IPOs, and IPOs of private equity-backed companies in particular is good – but time is of the essence for companies considering a flotation. In 2016, as the EU referendum neared, IPO candidates moved to hit an execution window in the early summer, and we are likely to see a similar trend this year. The fourth quarter is likely to see investors nervous in the face of Brexit and it won’t be a surprise if that affects market sentiment in the first half of 2019. Dual track processes as we saw with DH will likely be a feature of the markets over this period.
A key theme in the report is the interest of mid-market private equity houses in the IPO market, particularly Aim. This is the section of the private equity community that is particularly active in Scotland. We have recently seen the resurgence of IPOs in Scotland and, supported by a vibrant private equity community, we would expect to see some Scottish private equity-backed IPOs over the next couple of years.
l Rosalie Chadwick is a partner and head of corporate finance at law firm Pinsent Masons.