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Grocery chain Albertsons is reportedly planning to go public — and this will be more than just a test of the IPO market’s health.
Albertsons possible IPO will also be a test of claims that privately held companies perform better than publicly traded ones.
Initial indications are that Albertsons will fail this test. Though publicly traded grocers have suffered in recent years from competition from the likes of Amazon.com AMZN, +0.85% and Walmart WMT, +0.54% , Albertsons appears to have done no better, and quite possibly worse, than comparable publicly traded grocers.
To be sure, tracking Albertsons’ performance while private is difficult. But we do know that the company went private in January 2006 at a price tag of $17.4 billion and has since undergone a number of restructurings. The company in its current incarnation is preparing for an IPO that would reportedly award it a market value of around $19 billion.
It’s hard to make an apples-to-apples comparison of these two valuations. Consider the performance since January 2006 of seven publicly traded grocery chains. Though none of these seven is exactly comparable to Albertsons, they all have operated in predominantly the same space. Notice from the accompanying chart that the average cumulative gain of these seven, according to FactSet, is over 300%. (For context, consider that the S&P 500 SPX, +0.84% over this same period produced a cumulative total return of 246%.)
Notice also that six of these seven have outperformed the return represented by Albertsons’ going-private price in 2006 and its projected going-public valuation now.
Surprised? You shouldn’t be. As I discussed in a mid-November column, private-equity firms’ performance claims often are misleading. In that column I reported on research from Nicolas Rabener, founder of London-based FactorResearch, who found that private-equity funds, on average, have not outperformed the stock market on a risk-adjusted basis over the past 30 years.
That means that any apparent outperformance by private-equity funds is most likely due to their greater risk. This is especially important information right now, since investors are increasingly looking to alternative investments such as private equity, since the stock market appears to be so overvalued and the bond market is unable to promise much more than breaking even after inflation.
But, to repeat what we already know but too often overlook, if something looks too good to be true, it probably is.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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