Investors are getting short-changed by private equity finds that float companies just a year after acquiring them. According to research by Josh Lerner of Harvard Business School and Jerry Cao of Boston College, while companies backed by private equity firms generally outperform the market, the same isn’t true when p.e. firms do a “flip,” namely listing their new acquisition within 12 months. “The evidence provides a partial support for the claim that “flipping” leveraged buyouts does not provide much value,” the research found. The two professors, according to Financial Times, studied around 500 initial public offerings led by p.e. firms between 1980 and 2002, and found that flipped companies underperformed the Standard & Poor’s 500 by 5% for the first three years of being public; in contrast, companies that floated more than a year after going private outperformed the S&P500 by 23%. Recently, private equity firms have been criticized for being quick-switch artists, and making a mint; the study suggests they do so at the expense of investors. This report may get investors thinking about some up-and-coming IPOs that may be a little too soon for comfort -namely a $1 billion listing of Hertz rent-a-car just nine months after being acquired by a group that includes Clayton Dubilier & Rice, The Carlyle Group and Merrill Lynch; the float of drug maker Warner Chilcott just 18 months after being taken private by Bain Capital, Thomas H. Lee Partners, JPMorgan and Credit Suisse; and French wholesaler Rexel, set for a listing just a year after being bought by p.e. groups.
