PE-backed UK IPOs outperform, but listings remain slow

Despite generating eye-catching headlines, flotations have not historically been the preferred exit route for private equity vendors. Indeed, according to Unquote Data, between 1998-2017, they accounted for just 8% of successful exits in the UK market compared with 59% accounted for by trade sales and 24% by secondary buyouts and secondary buy-ins.

However, a recent report by the BVCA and PwC found that from January 2009 to December 2017, private-equity-backed IPOs in the UK significantly outperformed non-private-equity-backed flotations. Companies that listed within the timeframe, and had previously been backed by a sponsor, were trading on average at 43.9% more than their offer price, while those with no history of private equity backing trading just 26.6% higher.

"In 2014 and 2015, we saw a large number of private-equity-backed companies come to the market," says Lucy Tarleton, a director in the capital markets group at PwC. "Their strong performance since has indicated that the market is very receptive to them. That, in turn, has made the IPO route more attractive for other potential issuers with private equity backing."

It stands to reason that, with such a track record, subsequent UK public market demand would encourage more private-equity-backed listings. Yet, the number of listings of UK-based portfolio companies has dropped significantly since reaching its post-crisis peak of 25 in H1 2014. From a high of 32 IPOs in 2014, the total fell steadily to 13 in 2015 and six in 2016, before picking up to 12 in 2017, according to Unquote Data.

False start
The high volume of listings in 2017 was driven largely by a flurry of flotations – seven in total – in Q4, which indicated the IPO market might once again be opening as an exit route for private equity owners. But 2018 has, to date, seen only three such exits; the £310m flotation of CBPE Capital-backed financial services provider JTC, the £217m listing of LDC-backed computer games developer Team17, and the £280m IPO of another computer games developer, Balderton Capital-backed Codemasters.

"IPO activity as a whole is quite subdued in London at the moment, compared with what we saw in 2017," says Tarleton. "Partly, that is because in 2017 there was somewhat of a backlog of companies that had held off on listing in the UK due to the uncertainty of 2016. And that backlog is now naturally slowing, so we are likely to return to the levels of activity that would be expected in the stage of the cycle we find ourselves in."

It is likely that US public market volatility in early February has also been partially accountable for the drop off in UK public market exit activity. With Wall Street suffering its worst week in two years in early February, global markets responded in kind with the FTSE 100 experiencing a drop of 4.9% in one week. In the three months that followed, three non-private-equity-backed UK listings – those of Supreme, Performatrix and Core Industrial – were put on hold as a result of market conditions.

IPO activity as a whole is quite subdued in London at the moment, compared with what we saw in 2017" – Lucy Tarleton, PwC

However, the public markets have witnessed a sustained recovery since the end of March, with the FTSE 100 reversing its Q1 losses and reaching a record high towards the end of May. Consequently, there are signs that public market exit activity could pick up in the coming months.

One week after Team17's IPO in May, Balderton's Codemasters listed on London's AIM market. Just a few days later, Elysian Capital-backed Tekmar Group, a provider of offshore wind cable protection systems, announced its intention to float.

Tarleton suggests that, while we are unlikely to return to the levels of activity seen in 2014, others are likely to follow suit. "From a private equity perspective, there are still a number of listings expected to come through this year," she says. "But many vendors are now keeping their options open and we have seen an increase in dual-track processes. The public markets are increasingly having to compete against the rising valuations that private sector buyers are willing to pay."

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