KKR’s Prudent IPO Preparation

The Financial Times reported on Saturday that KKR is prepping at least five of its portfolio companies for initial public offerings. They are: Dollar General, First Data, HCA, TDC and Toys ‘R Us (Erin suggested a few of these last week). This is in addition to Avago Technologies, which has already filed and is expected to price later this month.

I read some cynical responses to the news, suggesting that the debt on a typical mega-buyout portfolio company would make such offerings unappetizing to public market investors. Moreover, there is a more general argument about how most company revenues are at or near cyclical lows, and that PE owners should wait until the internal financials improve (Dollar General, of course, being a countercyclical example).

I get the arguments, but most PE firms don’t get close to complete liquidation in an IPO. On the Avago offering, for example, KKR and Silver Lake would only have their combined ownership percentage shrink from 80.7% to 68.4 percent. IPOs can throw off some droplets, but the real purpose is to pave the way for future downpours. That means either going public (and thus getting a head start on the lockup period) or at least prepping an IPO, so that you’ve got options once the market improves.

Yes it costs money, but it’s a worthy opportunity cost.

KKR’s prep-work is getting noticed for two reasons: (1) It wants to list itself in NY; (2) It’s disintermediating the banks, and there’s some Wall Street fascination/dread with how that works out. Truth is, though, I’d be stunned if other big-name firms weren’t doing the same with less fanfare. They’d almost be irresponsible not to.