PE Firms Begin See Some Light Through IPO Window

NEW YORK (Reuters) – Private-equity firms are cautiously looking for ways to exit investments by bringing portfolio companies to market, after seeing a sliver of opportunity for new stock flotations.

Bankers and lawyers report a rise in the number of portfolio companies in their IPO pipelines and a increased level of talks with private-equity firms.

“There’s a slow snowball picking up,” said Richard Truesdell, co-head of the global Capital Markets Group at law firm Davis Polk & Wardwell in New York. “We are miles away from the frenetic activity of 2007 but we are also hopefully miles away from the complete absence of IPOs that we had.”

A tentative rebound in shares has given rise to speculation that IPOs will return more forcefully. Since a multiyear low in March, the Dow Jones Industrial Average .DJI has risen about 30 percent.

But grave concerns remain about investor appetite, the amount of leverage on companies and whether private-equity firms will get adequate returns in the market to appease the investors in their funds.

Investors are also wary of the fragility of equity markets, meaning any significant spurt of listings is a way off. That’s borne out by the small number of private equity-backed firms in registration.

Owners may also seek to float just a small portion of firms and do follow-on raisings if the market improves, bankers say.

“I expect we’ll start to see filings starting shortly (from private equity-backed firms),” said Lisa Carnoy, global head of equity capital markets for Bank of America Merrill Lynch (BAC.N).

“I doubt more than a handful of these will come in 2009 but you will see a significant pipeline in 2010.”

Private-equity firms buy companies with the view of exiting investments several years later, either through selling to a trade buyer or a rival or by taking the company public. Exiting allows them to make distributions back to the investors that put money in their funds.

But good opportunities have been sparse with the IPO market effectively shut since the credit crisis hit.

So far this year, the only U.S. private equity-backed IPO has been ABS Capital’s language software firm Rosetta Stone Inc (RST.N) — a far cry from the decade high in 2006, with 66 listings yielding $17.5 billion according to ThomsonReuters.

That’s filtered through to lower distributions made to investors by buyout firms — which shrank to $63 billion in 2008 on a global basis, according to London-based private equity research firm Preqin. That was far less than the $182 billion distributed the previous year.

In 2008, the industry also distributed far less than it called — a sharp turnaround from the boomtime. Capital calls — the requests private-equity firms make to their investors to send previously committed capital — totaled $148 billion.

That isn’t expected to turn around any time soon.

“What’s clear is that capital calls will pick up well before significant distributions commence again,” said David de Weese, partner at specialist secondary firm Paul Capital.


The most likely sectors cited by bankers to file for IPO are those that haven’t been hit so hard by the economic downturn. Heathcare, education and potentially energy are cited, as well as select companies such as discount retail firms that are weathering the crunch in consumer spending.

Speculation has surrounded discount retailer Dollar General, a Kohlberg Kravis Roberts & Co [KKR.UL] investment. KKR wrote up the value of the retailer in May.

KKR, which also wrote up the value of its investment in hospital operator HCA, struck a deal in June to sell IPO stocks through Fidelity Investments, suggesting it might be gearing up to take public some of the companies in its portfolio.

Private equity-backed firms that have submitted initial IPO registration documents include firms in noncyclic industries such as education provider Education Management Corp.

Joshua Ford Bonnie at law firm Simpson Thacher & Bartlett said that while there has been a change of “night and day” in terms of sentiment since late 2008, he hasn’t seen a significant change in the mix of firms looking to file for IPO backed by private equity versus those that aren’t.

In London, the mood is also improved.

Andrew Roberts, partner at London-based law firm Travers Smith, said potential candidates for flotation would be firms servicing their debt comfortably. He cited private equity-owned companies such as frozen food company Birds Eye Iglo Group, cereal maker Weetabix and automobile travel insurance group Acromas as speculated candidates to file for IPO.

The IPO route has paid off handsomely in the past. For example, Burger King paid its private-equity owners — Bain Capital, Goldman Sachs Capital Partners (GS.N) and TPG [TPG.UL] — a $367 million dividend before its IPO in 2006. It used proceeds of the offering to repay debt stemming from that dividend.

But the equity markets remain fragile, with significant constraints on taking overly debt-laden firms public.

“Over-levered equity plays are a much harder sell in this market,” said Mark Hantho, global head of equity capital markets at Deutsche Bank (DBKGn.DE).

Merrill’s Carnoy said that many of the LBOS from 2005-2007 will look to the IPO market both to repay upcoming debt maturities and as a source of liquidity for the sponsor.

Another concern is the availability of affordable credit.

“An important component will be how the high yield market is faring because people want to know that these entities have access to refinancing,” said Jeff Bunzel, managing director for equity capital markets at Credit Suisse (CSGN.VX). (Reporting by Megan Davies and Phil Wahba in New York and Simon Meads in London; Editing by Gary Hill)