Despite a sluggish end to 2014, IPO momentum across Europe for 2015 looks more promising – (and more pan-European), with new deals coming from several countries after the U.K.'s dominance of issuance for the past few years.
Equity prices have shot up since the start of the year, with the FTSEurofirst 300 Index rising more than 15% from the beginning of January to March 11. This is causing many private equity firms to run dual-track sale processes, with public listings edging out private sales at the moment.
The latest Standard & Poor’s research on the current state of the IPO market shows that there is a lot of private equity demand to exit businesses that have performed well over the last few years, such as DFS Furniture Holdings PLC, which recently completed its IPO in the U.K.
Last year at this time, the IPO market was very popular for U.K. companies, but now—even though it is still early in 2015—we already see that the country distribution is growing wider, with only 20% of the deals, compared to 37% in 2014, according to data from the S&P Capital IQ platform.
The debt reductions and phased step-downs in private equity ownership that typically result from an IPO often improve credit quality and lead to rating upgrades. We also see improvements to companies' management and governance frameworks in preparation for the greater oversight and fiduciary responsibilities that a public listing entails.
Of the 16 publicly rated private equity-owned companies that have completed IPOs since 2003, we've raised our ratings on 11.
But investors are still being cautious about new flotations. Only companies with positive growth stories that have performed well throughout the downturn are able to go to the public offering market.
DFS has a long track record of sales growth and positive free cash flow generation, and has expanded its portfolio to 105 stores currently from 76 back in 2010. The company has a leading position in the U.K. upholstered furniture industry, with strong brand recognition, limited inventory risks, and an efficient supply chain, all of which support its sound operating performance.
In addition to the credit-positive impact of most IPOs for companies in Europe, there is another facet to the credit story.
Often when the market isn't favorable for IPOs, private equity firms will structure dividend recapitalizations to take cash out of certain businesses. This increases leverage and adds to the credit risks for debt investors. If IPOs continue at a steady clip in 2015, it should help to curb the number of dividend recaps in Europe's leveraged finance market.
Get a more detailed view of the IPO market credit story in Standard & Poor’s latest Inside Credit report: IPO Momentum Picks Up In Europe As Private Equity Owners Look For Exits