Yesterday I pointed readers skeptically to the article on TheStreet.com warning investors off of LIPOs. I wondered after the long-term performance of these issues, given that TheStreet.com only commented on the year to date returns of these instruments (which have been poor this year). It does strike me as silly, given the dot-bomb era, to seek to make returns on IPOs with a sub-twelve year time horizon, after all. That's so... 1998.
Luckily, a faithful reader in the employ of UBS (their bankers tend to be pretty sharp I find) pointed me to a paper titled Performance of Reverse Leverage Buyouts on the long-term returns of what the authors call "reverse LBOs" (RLBOs) or the performance of formerly LBO'd IPOs. The results are interesting. Say the authors, Jerry Cao and Josh Lerner:
In this paper, we examine 496 RLBOs between 1980 and 2002. The following conclusions emerge from the analysis:
RLBOs appear to consistently outperform other IPOs and the market as a whole. The positive returns appear to be economically and statistically meaningful.
No evidence of a deterioration of returns appears over time, despite the growth of the buyout market. RLBOs performed strongly in the late 1980s, the mid 1990s (less consistently), and the 2000s.
RLBOs sharply outperform the market in the first, fourth, and fifth year after going public; performance in other years is more ambiguous.
Much of the outperformance seems associated with the larger RLBOs, but this may be driven by the apparently superior returns of RLBOs by groups with more capital under management at the time of the offering.
There is no evidence that more leveraged RLBOs perform more poorly than their peers.
Perhaps more interesting are the debt figures for these transactions. The authors identified the average post IPO total debt/capitalization of RLBOs for their study as 47.87 versus 27.84 for non-RLBO IPOs. In other words, despite having (or perhaps as a result of having) nearly twice the debt load, these transactions outperformed IPOs over the long term between 1980 and 2002.
Beware, however, what the IPO proceeds are earmarked for. IPOs with proceeds that are not used for debt service but rather "other purposes" exhibited dismal returns.
The paper is a must read for anyone interested in the topic, except apparently, TheStreet.com.
