KUHN CAPITAL Sunday, February 25, 2018
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Are R-LBO's Good for You?


R-LBO’s (reverse leveraged buy-outs) occur when a PE group takes a portfolio company public to reduce the typically large debt it used to buy the business, and to exit the investment. How do R-LBO’s perform after their IPO? The research contradicts common perceptions.

According to Harvard Business School professor Josh Lerner, R-LBO’s do surprisingly well. He tracked nearly 500 PE-led IPO’s over a 22-year period (1980 – 2002) and found that R-LBO marketcaps appreciated more than that of other IPO’s as well as the market in general. Specifically, he found that R-LBO’s generated a buy-and-hold return of about 18% in their first year, 44% in three years, and 72% in five years. Also surprising, he found that the largest IPO’s generated the strongest returns.

Lerner speculates that the reason for this is that PE groups do a good job of preparing their portfolio companies for public status regardless of the economic cycle. Examples of such preparations are effective financial reporting, investor relations, and strategic planning systems.

Of course here are exceptions to this attractive picture, e.g., the notorious Refco and Warner Chilcott.

On the other hand, Lerner also found that “quick flips” – IPO’s undertaken less than a year after the PE firm’s original purchase of the firm – were a lot less productive. They underperformed the S&P 500 by 5% in the three years following their IPO. A recent example may be Hertz. Caveat emptor.

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