Between 1998 and 2004 private equity firms backed approximately half the UK companies that floated on the London Stock Exchange’s main market. Based on this assessment, the British Venture Capital Association (BVCA) and the London Stock Exchange (LSE) have commissioned Oxera to conduct research to assess the attractiveness of the London markets for private equity-backed IPOs.
According to the research, private equity-backed companies floating on the Alternative Investment Market (AIM) constitute a smaller proportion (around one-tenth) of total IPOs. However, the relative importance of AIM has been increasing in recent years, and in 2004 about half of all private equity-backed IPOs were on AIM.
When measured at original cost, divestments by private equity firms at IPO, or by subsequent sale of quoted equity, average around 20% of the total amount divested over the 1998 to 2004 period. Trade sales are the most important exit route, constituting around 35% of divestments.
The report also analyses the after market performance of private equity-backed IPOs by considering the initial and longer-term returns for a sample of 32 private equity-backed IPOs and 30 other IPOs that occurred on London’s main market in the years 1998 and 2001 to 2004 (excluding the bubble years.) Over the course of one year following flotation, private equity-backed IPOs tended to outperform other IPOs. Private equity-backed returns were 15.2% (unweighted) and 13.8% (weighted.) In comparison, one-year returns of the other IPOs were 6.1% and -1.9%, respectively. This suggests higher returns are earned by private equity-backed IPOs, although a larger sample size would be required to establish the statistical significance of the results.