I’ve had the conclusion from Steve’s post Give all Private Equity Floats a Miss meandering through the brain all weekend. He’s right, our wariness around private equity jetsam is longstanding and justified.
And yet we own two smaller European positions in the Forager International Shares Fund that were sold by private equity to public ‘suckers’ in the not too distant past. We didn’t buy in the float itself, but 12-24 months later at a time when caution is still warranted.
One stock was bought at lower than listing price, another we paid a small premium for (results had been rapidly improving).
Perhaps buying post-listing is sufficiently different to buying in the IPO. Perhaps owning these positions is a mistake (although it certainly hasn't been so far). Perhaps every rule is there to be broken. I don’t know what to make of it all.
While mulling it over, I came across The Credit Suisse Global Investment Returns Yearbook 2015. There’s a lot of interesting stuff in the report for the eager reader. I bring it up here because of the data outlined on printed page 11.
It shows the cumulative returns of ₤1 invested into one of four UK stock market portfolios in 1980 and rebalanced annually until 2014.
The first portfolio was invested into stocks which had been listed for less than 3 years, the second in stocks listed 4-7 years, the third in stocks listed 8-20 years and the fourth in stocks listed for 20+ years. In other words, it seeks to measure the long term performance of investing in newly-listed stocks versus stocks listed for decades, and everything in between.
I won’t republish the chart—Credit Suisse’s permission to reprint is unlikely to be forthcoming in a timely fashion. But the results won’t surprise you, Steve or anyone. An investor in the least ‘seasoned’ portfolio earned ₤20, the 4-7 year portfolio returned ₤33, 8-20 years delivered ₤49, and 20+ years ₤61.
Perhaps we shouldn’t skip just private equity floats but all IPOs and indeed any stock that hasn’t been traded continuously for 20+ years?
My take is a little different, perhaps influenced by being lucky enough to buy Flight Centre a few years after its IPO in the mid-1990s.
Over the first few years of their listed life, recently IPOed stocks are probably more likely to be mispriced than a well-seasoned company. If the UK data hold globally, and for a variety of explainable structural reasons, then that mispricing is clearly more often ‘overpriced’ than ‘underpriced’. But underpriced situations should be frequent enough to warrant attention.
We’re unlikely to participate directly in IPOs, those offered by government sellers being a potential exception. And we’ll be more than shy about buying anything recently-listed, particularly when the former owner was private equity.
But don’t expect to see any cast iron rule against buying such stocks, or else I’ve got some selling to do. Value is where you find it.
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Forager Funds is a boutique fund manager specialising in a value investing approach. We offer an ASX listed Australian Shares Fund as well as an International Shares Fund both aimed at delivering returns for long term investors.