Boston – Feb. 20, 2020 – It turns out that the IPO magic has long been more hype than substance. Bain & Company analysis shows that two-thirds of companies that went through global IPOs underperformed against their established peers, with a weighted annual average total shareholder return (TSR) of 0.4 percent, far lower than the 8.4 percent of the respective indices.

According to the new report, Reversing the Winner’s Curse of the IPO, the underperformance of companies after their initial public offerings is a global phenomenon that extends well beyond the technology sector. Bain & Company’s analysis of all IPOs that stayed public from 2010 through 2014 finds that they underperformed against their established, publicly listed peers, often substantially (more than 100 percentage points short of the benchmark). Post-IPO companies had an annual weighted average total shareholder return (TSR) that was 8 percentage points lower in the five years after the IPO. Performance was particularly weak in India, Indonesia, Brazil and Russia. Only China and Switzerland were at par with their indexes. Most of the 30 largest global IPOs underperformed, and the weakest sectors were retail and healthcare.

These finding come as the number of publicly held companies has fallen in the US, with levels dropping from 8,090 in 1996 to 4,397 in 2018, according to the World Bank. Instead, money has been flowing towards private equity, with investors allocating a staggering $7.1 trillion to the industry since the start of the current economic cycle in 2009. Despite the trend towards financing in the private markets, IPOs still hold inherent value for certain companies.

“IPOs remain relevant for companies looking to raise substantial capital quickly to fulfill growth targets, or gain credibility and recognition,” according to Hubert Shen, a partner with Bain & Company’s Mergers & Acquisitions practice and co-author of the report. “Elite companies that outperform view the IPO as a beginning and a means to longer term value creation rather than the end in itself.”

Bain & Company’s research identified three key actions that winners take:

1. Have a long-term vision:  Winning companies view the IPO as a springboard to longer-term value creation by using the proceeds in ways that maximize long-term value. They have already defined the vision for revenue growth, cash flow and profitability, along with a path to achieve those goals and alignment among the senior leaders about the vision
2. Know who the shareholders are and what they want: Many of the newly public companies that outperform their established peers have gleaned how pre and post-IPO investors have fundamentally different objectives and incentives. Private company investors look for liquidity, want as high a valuation as possible and frequently push executives to tell as rosy a story as possible in order to maximize the proceeds at the IPO. Investors after the IPO have other priorities and look, in particular, for a practical scenario with some blend of growth and profits that the company can achieve.
3. Tell the story of your strategy: Any IPO candidate needs technical capabilities to prepare for the launch. But companies that eventually outperform don’t rely solely on transactional help, such as the services provided by investment banks and the various boutique advisory firms that are motivated to maximize IPO proceeds. They also emphasize strategic support that will help build long-term value creation.

 Too many firms underestimate the demands of being a public company,” said Henrik Poppe, a partner with Bain & Company and co-author of the report. “To pull off a successful IPO requires more than just financial engineering: you need to have a solid strategy for your future and communicate this to new shareholders in a manner that makes then invest for the long-term.”

Editor's note: To arrange an interview with the authors, contact Dan Pinkney at dan.pinkney@bain.com or +1 646 562 8102.

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