Special Situation Investing

Thursday, August 24, 2006

Private Equity IPO's

Are private equity IPO's special situations? Business week ran an article a few weeks ago on them. From the article:

The question is: Will the Hertz deal be good for public investors? If other recent IPOs are any indication, the answer is a resounding no. On average, the stocks of companies taken public by buyout firms this year have fallen 6%. In contrast, shares of companies that have gone public without any assistance from buyout firms have risen 0.7%.

Okay, fine, so they are not good investments this year, why investors even care about such short-term performance is beyond me. What I want to know is whether they are superior long-term investments. If I have to wait a few years that is fine. The article has this to say on long-term performance:

Soon-to-be-released research by professor Josh Lerner at the Harvard Business School will show that in the last two decades, companies taken public by buyout firms have outperformed other IPOs and the major market indexes. That's because buyout firms usually take three to 10 years to carry out the sort of operational improvements that could justify their huge payouts in IPOs.

Now I am not saying that all private equity IPO's are buys, many are over-burdened with debt and I would only purchase them on deep discounts. Then again as they lose credibility in the mainstream press you are more likely to see these discounts.


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