UK listings frenzy expected to abate amid investor concerns

There is no escaping the seemingly endless and extremely high-profile private equity-backed IPOs that have laid the foundation for impressive exit figures for Q2. However, the asset class is in danger of putting itself back in the doghouse.

In June alone there were 23 exits in the UK recorded by unquote" data, reaching a combined value of €8.8bn, marking the year's most successful month in terms of divestments. The exits even surpass the impressive total value of divestments achieved in May 2013, which came in at €8.4bn. And while March 2013 saw 33 exits in total, their combined value was just €1.9bn.

However, on the investment front, overall Q2 activity looks as though it will be lacklustre, with no improvement on activity levels seen in the first quarter, which at the time were labelled as disappointing. Furthermore, new investment activity is still nowhere near levels seen in Q3 2013, when there was a total of €9.2bn deployed in the UK - just €3.9bn has been invested so far for the second quarter of this year.

IPO wave leds to impressive exit figures but leaves many sceptical

Gold rush
Of course, the key driver of the impressive exit values seen in recent months has been the continued rush of listings. Notable IPOs in June include AA, backed by Charterhouse, CVC and Permira, which achieved a market cap of £1.38bn; Towerbrook's Volution, which generated a market cap of £300m; venture-backed Zoopla, which achieved a whopping £919m valuation; Inflexion's FDM, valued at £308.5m; and Clayton Dubilier & Rice's listing of B&M for a cool £1bn.

While it is essential the asset class takes advantage of the current frothy public markets, the industry is in danger of returning to the bad books of institutional investors, previously burned during the pre-crash spate of IPOs with its raft of dual-track processes and overvalued assets. At the LPEQ conference held in London in early June, some interesting warning signals appeared. First, in an audience poll, delegates were asked if they would rather be the seller of assets in the current IPO market, or the buyer. Tellingly, 66.3% wanted to be sellers and only 12.4% would want to be buyers.

James Macpherson, managing director and portfolio manager of BlackRock, signalled that sponsor-backed listings were already in danger as processes are being rushed and the quality of documents is slipping. Furthermore, Alex Cooper-Evans, partner at Electra Partners, hinted at the escalating valuations for IPOs. He said he could think of at least six recent offerings where he could not agree with the valuations: "Some of these are businesses we know well; I wouldn't have paid what the market did."

There are definite signs the IPO window is now closing. Adam Young, global co-head of equity advisory at Rothschild said he would not be surprised if the current pipeline of IPOs never make it to market: "A lot of these companies preparing for listings are running dual-track processes; I expect more of these to end up in M&A instead."

Indeed, the recent sale of TA Associates' M and M to trade buyer Bestseller for £140m is a neat example of this, as it had originally planned to list on AIM. Bridgepoint's decision to pull the IPO for portfolio company Fat Face at the end of May is another signal that the market is overheating.

Ply your trade sales
But while recent listings are filling headlines, it is important to note that, of the swathe of exits witnessed in June, the majority were trade sales, with just a peppering of secondary buyouts. Notable trade sales included Cinven's sale of Partnerships in Care for $660m; Albion Venture-backed Atego sold to PTC for $50m; Phoenix's divestment of Precise Media to Kantar Media; and Isis's sale of Williams Medical Supplies to DCC for £45m.

Growing concerns over tumbling share prices for recently listed sponsor-backed assets will undoubtedly see commentators tarring private equity with the same old brush, of swindling institutional investors as a means of hastily exiting overvalued assets. But as the IPO window comes to a close, the encouraging trade sale activity ought to be the sort of stuff grabbing headlines.

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