BOSTON — Initial public offerings of leveraged buyout-backed businesses have gotten a bad rap, two professors say.
Contrary to popular belief, the initial public offerings of leveraged buyouts, called "reverse LBOs" outperform other IPOs and the market as a whole, according to a paper released Sept. 29 by Josh Lerner, the Jacob H. Schiff professor of investment banking at Harvard University's Graduate School of Business, Cambridge, Mass., and Jerry Cao, a doctoral candidate at Boston University.
When these stocks drop, however, investors suffer because the buyout funds retain some ownership of portfolio companies after they go public. Also, investors are sometimes paid their share of the profit in company stock, and they also sometimes buy back the stock from buyout firms as part of the public equity investment strategy, Mr. Lerner said.
"To date, much of the discussion of these offerings has focused on a few troubled offerings such as Refco," Mr. Lerner said.
Private equity firm Thomas H. Lee Partners LP, New York, bought Refco Inc., a New York financial services company, for $500 million in 2004 and took it public at more than double the price in August 2005. Refco became insolvent just two months after the private equity firm that owned it took it public, filing for Chapter 11 bankruptcy on Oct. 17, 2005.