It turns out it’s not the best idea to buy everything the smart money is selling.
The 32% plunge in SeaWorld Entertainment Inc. (SEAS) shares Wednesday — after a disappointing earnings report and fears of a lasting backlash against its treatment of animal performers — was an extreme dousing for a once-coveted stock.
Yet the fact that SeaWorld was controlled by buyout firm Blackstone Group LP (BX) until its April 2013 initial stock offering offers a good excuse to note that the recent crop of IPOs from private-equity-backed companies has performed appreciably worse than all newly public companies as a group.
IPOs of companies that had previously been acquired by buyout shops have been a prominent element of the strong new-issue market over the past couple of years. The 20 largest private-equity-backed IPOs since January 2013 raised $21 billion in aggregate. Shares of those IPOs since January 2013 have appreciated by 25.3%, on average, from their offer price (which, of course, only institutions and plugged-in wealthy individuals can typically access.)
That’s pretty respectable, and compares with a hypothetical gain of about 15% if one instead bought the SPDR S&P 500 index fund (SPY) at each of the 20 IPO dates instead. And there have been impressive winners, including HD Supply Inc. (HDS), up 46% since June 2013, Norwegian Cruise Line Holdings (NCLH), up 70% since January 2013, and Pinnacle Foods Inc. (PF), 54% above its March 2013 IPO price.
Yet the universe of all IPOs, as tracked by the FTSE Renaissance IPO Composite Index, gained more than twice as much as the private-equity-linked IPOs, rising 62% since January 2013. The FirstTrust US IPO Index ETF (FPX) is up more than 46% over the same period. A Dealogic study cited recently by a Wall Street Journal blog pointed to stronger relative performance since 2010 of an earlier class of PE-backed IPOs, though the pattern has reversed in 2014.
SeaWorld now stands as the worst performer of this recent PE-backed new issue cohort, though Taylor Morrison Home Corp. (TMHC), from April 2013, and Michael’s Stores Inc. (MIK), which just hit this past June, are also down double-digit percentages. Another poor performer has been Coty Inc. (COTY), a personal-care products maker, whose shares are about flat since debuting in June of last year, versus a 19% climb in the broad market.
The peak of the prior leveraged-buyout cycle coincided with the top of the early-2000s credit bubble in 2006 and 2007, and by last year those companies had “ripened” inside private equity portfolios. As the stock market took flight in 2013, the window opened wide for these so-called reverse LBO deals.
It’s logical that former buyout targets would, at this stage, perform somewhat worse than the total universe of initial offerings in a strong stock market. They are typically mature companies that have been bought by professional corporate acquirers using plenty of debt. The ones coming public now likely needed more financial tuning and higher market valuations to return to public markets. PE firms tend to be resolute about what valuation to place on the stocks as they return to the public market, which directly impacts their funds’ performance. While many continue to hold shares after the IPO, it’s in their interest to be fairly aggressive in setting a full “exit price.”
Frequently, too, the companies have been recapitalized with new debt not to fund the business but to finance cash dividends to the PE sponsors before their IPO. And, finally, they tend to be relatively straightforward, easy-to-value businesses, not hot growth stories primed to deliver hype and a heady first-day pop in the stock.
In SeaWorld’s case, the stock did get a first-day lift to $33 from the $27 offer price, as the company celebrated with penguins on the floor of the New York Stock Exchange.
Public enthusiasm over the familiar theme-park business carried the shares to the high-$30s by July 2013 – which is when the documentary “Blackfish” was released, assailing the treatment of orca whales in the company’s shows. Weak attendance trends in recent quarters have been attributed in part to wider public awareness of the issues aired in "Blackfish." (SeaWorld outlines its own case against the documentary on the website "Truth About Blackfish.")
Blackstone reduced its financial interest in SeaWorld this spring, selling $550 million worth of stock at around $33 per share, dropping its stake to around 25%. Wednesday’s washout took the stock down to a post-IPO low of $18.90.
There’s nothing surprising or sinister about how Blackstone handled this investment. But it does offer an extreme example of the potential hazards of providing the bid when the big-money buyout artists are looking to cash in and declare victory.