Since 1975, there have been over 9,500 companies that have gone public with an initial public offering (IPO). So what are the pros and cons of investing in IPOs, or at least relatively ‘new’ companies on the stock market? The data shows that the percentage of returns on IPOs from 2000-2010 during the first five years after the IPO have a mean of 8.1% annual returns. The data also shows that it is better to buy and hold IPOs as the mean returns after the 1st year is a disappointing -8.9%, versus waiting until the 4th year to see year-four returns of 29.2%. Despite these positives, there are 2 facts to consider. First, for better (mergers or acquisitions) or worse (bankruptcy), many IPOs wind up vanishing within 5 years. Second, IPOs generally have underperformed other established firms of the same size by an average of 3.3% per year during the five years after the IPO.
Carlyle Group LP (NASDAQ:CG)
If you are thinking about investing in food services, waste management, aerospace and defense, finance and insurance, health care and social assistance, manufacturing, technical services, retail trade, energy and power, telecommunications, media, or other industries, you might want to consider letting Carlyle Group LP (NASDAQ:CG) take care of that for you instead. Carlyle is one of the world’s largest global asset management firms that originates, structures, and acts as lead equity investor in management-led buyouts, strategic minority equity investments, consolidations and buildups, bank loans, high-yield debt, and many other investment opportunities. In short, Carlyle makes money by investing money into companies with growth potential and gains control with the end goal of making much more back in ‘leveraged buy outs’ (LBO), interest, and management fees.
Since its IPO last May, Carlyle has seen over 43% returns in share price, including its 2% dividend. Based on the most recent earnings report, net revenues were $858.5 million for the three months ended Sept. 30, 2012, which was an increase out of the red by $918.1 million from the same period in 2011. What is important to realize is that while revenues has been going up primarily due to performance fees, profit margins from quarter to quarter fluctuate a lot more than your typically traded company. It isn’t uncommon based on their history for Carlyle to see net profit margins over 50%. However, due to the business model, the company relies heavily on making the correct investments each and every time and making sure the companies they invest in are able to produce a return for Carlyle’s bottom line.
Carlyle is currently behind TPG Capital and Goldman Sachs Capital Partners for title of world’s largest private equity firm in terms of capital raised. Keep in mind the word ‘private’ isn’t there by mistake. Many of the equity securities within Carlyle’s portfolio consist of companies you may never have heard of and they are not publicly traded. With little information for the average person to gain an understanding of what to expect in returns from owning Carlyle stock, this may be a drawback for information-hungry investors.
CG Total Return Price data by YCharts
Phillips 66 (NYSE:PSX)
A spin off of ConocoPhillips, Phillips 66 (NYSE:PSX) currently has seen over 86% share price returns that include its 1.6% dividend that has already increased 25% since its IPO last May. The holding company operates in 3 segments: Refining and Marketing (R&M), Midstream, and Chemicals segments, which cover the transport of crude oil and petroleum products, power generation operations, natural gas transport, petrochemicals, and plastics.