Private equity’s relationship with debt is something like Ebenezer Scrooge’s relationship with the Ghost of Christmas Past, in that it may not be free of the dragging, clanking chains of low returns until firms stop loading companies with so much debt.
Exhibit A: Private equity-backed IPOs are delivering dismal returns in their first month of trading, according to new reports from Bloomberg and Renaissance Capital:
“The 13 offerings by private-equity funds have fallen 2 percent in the first month of trading after averaging gains every year since at least 2001, according to data compiled by Bloomberg and Greenwich, Connecticut-based Renaissance Capital LLC. The IPOs have also lagged behind the Standard & Poor’s 500 Index, while companies without support from buyout firms have beaten the benchmark gauge for U.S. stocks by 5.8 percentage points after their initial sales.”
The implications are obvious: PE firms need today’s IPOs to produce strong enough returns to attract buyers for tomorrow’s IPOs. Otherwise, options can become painfully limited for portfolio companies that need new capital in order to pay down debt (the active high-yield markets only provide a way to extend the debt maturities).
So how about the Renaissance Capital data in that Bloomberg story? Well, it only measures a single month of performance.
If you extend the view to three months, the trading looks better. Dealogic reports that the day after the offering, U.S. IPOs backed by sponsors moved up 4% and sponsor-backed companies listed elsewhere jumped 8.6 percent. After three months of trading in 2010, U.S. sponsor-backed IPOs were up 9.2% while global ones were up 6.8 percent.
And Renaissance Capital’s own site shows that IPOs overall are hardly doing fabulously: The average return of all 49 IPOs in 2010 to date is… a paltry -1%. So private equity IPOs are actually ahead of the game, if you take the long view. And it’s even better if you consider that back in February, buyout chiefs doubted the PE IPO wave would even happen.
That’s not to say that sponsors are in the clear. One of the worst-performing IPOs of the year, Cellu Tissue Holdings, has fallen 27% in value since its IPO in January; the company was backed by Weston Presidio. Nearly all the IPO proceeds went to Weston Presidio; the remaining $29 million went to pay off the company’s debt.
But so long as private equity IPOs don’t do worse than other IPOs – and largely, they aren’t – the markets will remain welcoming. Remember, 2010 has been the biggest year for financial sponsor-backed IPOs since 2007, with 27 offerings to date.