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Private equity loses out to mega-IPOs

Gregor Schuster | Photographer's Choice | Getty Images

Fund managers have started to enjoy a reversal of fortune over private equity thanks to the buoyant market for initial public offerings and mega-listings such as Twitter's.

For years now, fund managers have noted that private equity was able to pay higher multiples when it came to putting up companies for sale. But now frothy stock markets have started to pay 10-15 percent more than private equity as a rush of companies line up for IPOs next year.

(Read more: No more secrets: Twitter IPO filing is now public)

Insiders say that average multiples now beat 10 times earnings and public markets are paying up to 15 percent more than private equity.

"Interestingly, in dual-track processes we are increasingly seeing the public markets beating private equity or strategic bids." said Alasdair Warren, head of sponsors at Goldman Sachs.

"IPO markets are extraordinarily strong. We expect the current strength to last for some time," said Warren.

According to Thompson Reuters, in Europe there have been 82 deals raising $16.9 billion so far this year, a 180pc increase to last year's figures. Cyclical debuts such as estate agents Coutrywide and Foxtons have seen their stock trade up as much as 20 percent after listing.

"As we see more deals successfully pricing and trading well, we expect more issuers, particularly those owned by private equity, to come to market," said Warren.

(Read more: Investors in Empire State of mind for big IPO)

"In the past it has been a waste of time to engage with management who then just sell up to private equity," said one UK fund manager referring to deals like Pets at Home, which was yanked from flotation at the 11th hour.

In recent years, European markets have been relatively hostile to private equity exits after deals like Debanhams, a UK retailer, soured sentiment. The rise in global fund managers investing in European IPOs has helped calm the waters alongside a handful of 2013 deals that have left money on the table for institutions.

Upcoming UK IPOs from Advent and Warburg Pincus for furniture retailer DFS and value retail store Poundland are expected to take advantage of this renewed appetite.

(Read more: Alibaba's big data may pose problems for a US IPO)

However, Merlin Entertainments, which was set for a 3 billion pound ($4.8 billion) London listing in the next few weeks, could be forced to delay its launch until agreement has been reached on the US debt ceiling. The ramifications of the problem could mean US fund managers are forced into an equities sell-off that could damage companies share price in the aftermath of listing.

Although no decision has been taken yet, insiders suggest that waiting until next month could be the "safer option".


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