Here’s why private equity backed IPOs almost always fail

Nick Sundich Nick Sundich, January 12, 2024

There have been way too many private equity backed IPOs that have turned out to be absolute duds for investors, especially on the ASX. Unfortunately, retail investors fail to learn from the mistakes of others and buy into them, lulled by the promise of growth from brokers and IR representatives, not to mention the Fear of Missing Out (FOMO).

 

Private equity backed IPOs usually fail

Private equity IPOs usually end out bad because private equity is all about maximising returns for them and not the people they are selling it to. Private equity will buy investments at discounted prices and build them up to sell to other investors.

Sometimes they might find fellow private equity firms that can see opportunities to create future value and sell to them. But at other times, they will list investments on the stock market, sometimes exiting completely at other times only selling part of their investment. By this point, the company will inevitably be far higher valued than it when it was first acquired and will be puffed up by brokers and IR professionals.

 

Why should I buy when Private Equity is selling?

Although companies may not fall as soon as they list, the hot money can quickly move elsewhere if the company has a bad financial result or has other bad news. This leaves retail investors holding the bag and they will sell at any price just to get out, leaving the price to fall lower and lower.

Just ask yourself this question: If private equity could see more value to be created, why wouldn’t they stay in for even a little while longer?

Some investors are seeing the light with significant slowdown in private equity IPOs in the past couple of years. There were 196 globally in 2021, raising US$74.5m. This slowed to $23.7bn, split across 52 deals in 2022 according to S&P Global. There has been an increase of private equity firms buying back companies that went bad post-IPO, to try and make money once again. These include EQT, Cinven and Silver Lake.

 

Examples of bad private equity backed IPOs

Adore Beauty (ASX:ABY) is the best example in recent times, going to market in 2020 with a market cap of over $600m but is now barely over $100m. It is an eCommerce player that specialised in beauty products. It garnered much attention because it raised the most money of any company with a female co-founder and CEO team, and also because of the exponential growth in eCommerce that occurred due to the COVID-19 lockdowns.

This private equity IPO was backed by a player called Quandrant. Although it retained its stake, it is worth noting that it was picked up less than a year beforehand and was likely wanting an exit at some point. The company’s co-founders sold shares to Quadrant in 2019 and sold shares again in the IPO. As Joe Aston’s memorable AFR column in February 2022 noted, there were certain women who bought shares for the first time and they were buying shares from Kate Morris rather than with her.

As of late 2023, it still exists and is confident enough in its future to knock back a recent takeover offer. However, investors can forget about it ever returning to pre-COVID highs.

 

Fast money in Fast Food

Collins Foods (ASX:CKF) is another example of a private equity IPO. Granted, it has turned out to be a great long-term investment over a dozen years on. However, it was a disaster to begin with and took a few years to recover from after the company missed its first prospectus forecasts.

Going back even further, Myer (ASX:MYR) was a bad private equity IPO, led by Blum Capital and TPG Capital which sold their investments at almost 6 times their initial investments. Shares never traded above their $4.10 IPO price and bottomed out at 19c amidst the Corona Crash. It was hit by the decline of brick and mortar retail generally, profit downgrades, Solomon Lew’s investor activism and continual replacement of turnaround plans.

So investors should always be cautious with private equity IPOs, by asking why the bigwig investors would be selling if they could see further growth potential?

 

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