IPOs Are Gone. Deal With It.

We’ve bemoaned a battered IPO market for almost a year now, with CNN reporting today that they’re down 75 percent.

But is it unusual? PE pros have said that the last unprecedented, unsustainable buyout boom was also an unprecedented, unsustainable IPO boom. They’re not expecting it to bounce back anytime soon. (Meanwhile some particularly bearish VCs think it’s been dead since 2002.)

The number one effect a poor IPO market has on private equity is, of course, no more exits. Its stunning: So far this year we’ve got a whopping total of four (four!) PE-backed IPOs completed, versus last year’s total of 37. Details on the Big Four below.

And it makes sense. If there is no logical strategic buyer for your portfolio company, and you’ve pulled all the levers that another PE shop might find attractive, you can say goodbye to that exit for now. Get ready to sit on that company; feel free to watch IRR shrink while you wait.

But tough odds haven’t stopped a few brave private equity-backed companies from barreling ahead with their filings. This week O’Gara Group, a homeland security company owned by Cincinnati, Ohio-based Walnut Group filed to go public for around $175 million. Last week a KKR and Silver Lake’s Avago Technologies filed to sell around $400 million worth of shares. Today Madison Dearborn filed to issue more shares for its partial SPAC exit of Great Lakes Dredge & Dock.

Bold moves. Perhaps Madison Dearborn, after adjusting their fund target size, is hoping to demonstrate success before a making a second round of fundraising calls?

Which brings me to the second effect of a dry IPO market. There is no shortage of early stage, venture-backed growth companies seeking additional capital. Their owners don’t want to sell out, but they need money to grow. They’re prime candidates for a IPOs.

But with public offerings out of the picture, the best option for those companies is to sell to a growth-focused private equity firm. According to LPs and fundraising sources, this kind of investing is one of the hottest areas for LP money right now. Investors are disillusioned with mega-buyouts, bored of a not-as-hot-as-expected distressed industry, and impressed the by frothy opportunities facing growth-focused firms. Why else would so many VCs be moving up-market into “growth equity”?

2008 PE-backed IPOs:

Apollo Management – Verso Paper – $624 million
Kelso & Co. – RHI Entertainment Inc – $201.3 million
W Capital Partners – RiskMetrics Group – $1.01 billion
Bruckman, Rosser Sherrill & Co. – Heritage-Crystal Clean LLC – $120 million
Source: Buyouts