The performance of reverse leveraged buyouts: Another look

A reverse leveraged buyout (RLBO) is a share offering to public investors of a company previously taken private through a leveraged buyout (LBO) led by a private equity firm. Studies of US RLBO performance (primarily over the period 1980 to 2005) indicate that RLBOs outperform other initial public offerings (IPOs) as well as the overall market in both the short- and the long-term. Conjectures by various authors notwithstanding, this performance has not been adequately explained.

The present study differs from previous studies of RLBO performance in two respects.  First, it examines European RLBOs, in order to establish whether they yield results similar to those of their US counterparts.  Second, it utilizes data from 2001 to 2011, encompassing the periods before, during, and after the global financial crisis, to ascertain whether the performance patterns observed in earlier periods (at least in the US) continued when financial markets were in upheaval.  In addition, the study evaluates a number of the explanations of RLBO performance proposed in previous studies.

The study is based on a sample of 421 IPOs between 2001 and 2011 in France, Germany and the United Kingdom, of which 52 are RLBOs. Performance is measured by examining returns one day, one month, one year and three years after the offering.  In addition, event study methods are used to investigate the impact of the financial crisis on RLBO performance.

Consistent with the results of earlier (US) studies, we find that European RLBOs outperform both other IPOs and the overall market.  The global financial crisis appears to have affected RLBO performance, which weakened between 2007 and 2009.  At the same time, RLBOs continued to outperform other LBOs and the overall market during this period.

In addition, multivariable regressions were used to assess various explanations for RLBO outperformance.  This analysis did not support any of the prevailing theories.  In particular, the value created by RLBOs does not appear to be linked to LBO duration, sponsor reputation or the level of leverage employed.  There is no evidence of time or industry effects.  Moreover RLBO performance is not related to market capitalization.  The explanation as to why RLBOs outperform both other IPOs and the market remains a puzzle. Two topics of particular interest for further study are: first, the role of incentives given to managers of the firms taken public through RLBOs, and second, differences between RLBOs subsequently repurchased by their sponsors and other RLBOs.