


Private equity firms are increasingly choosing outright sales instead of IPOs when it comes to cashing out of their investments as ECM is unable to compete with buyers capitalizing on accommodative debt markets.
Private sales are faster, less unpredictable, and let sponsors cash in without having to pay down debt, which is normally required before a highly leveraged company can list.
And with credit markets rallying alongside stocks, access to cheap credit is emboldening both corporate buyers and other PE firms to bid for assets.
“It’s not just sponsors, but corporate buyers have been aggressive too,” said Chris Sullivan, head of sponsors US at Barclays.
“Given the better tone in the credit market, the sale option is looking relatively more attractive, because a sponsor can get better financing and in turn offer a more competitive price.”
TWO ROADS
To keep all options open, sponsors have been following a dual track of filing for a public listing while still actively looking for a viable private acquirer.
“Recently, the dual-track processes have been more likely to result in a sale,” Sullivan told IFR.
In order to maximize the appeal of IPOs, private equity firms have often had to cut the price of the deals with a steep discount to generate a pop for buyers of the stock.
The eight private-equity backed IPOs that have priced so far in 2016, for example, have on average returned a hefty 31%.
One deal – SiteOne Landscape Supply, taken public by Clayton Dubilier & Rice in May – has returned an eye-watering 89%.
It was an appealing deal, but it was also priced very cheaply to comparables. CD&R could afford to do so: it had already recouped US$176m from a dividend recap in April.
As one of the underwriters at the time told IFR: “They were playing with house money.”
PRIVATE THOUGHTS
By contrast, private sales have been looking like the better move for many PE firms of late.
Thomas H Lee Partners, for example, was planning a mid-August IPO for inVentiv Health, a pharmaceutical research company.
Just two weeks before the IPO was to begin marketing, however, THL decided instead to sell half of its stake in the company to Advent International.
Sources familiar with the process said the US$3.8bn valuation obtained through the sale was less than what inVentiv had hoped to achieve through an IPO. But because of inVentiv’s leverage around the 6x level in the run-up to the IPO, the offering had to be structured as an all-primary deal.
All the proceeds would have gone to pay down debt to get leverage under the 4.5x level now typically needed to get stock investors on board, stopping THL from extracting any cash until several months after the IPO.
Selling half the business to Advent, however, allowed the private equity firm to immediately return capital to its partners and retain the high leverage in the business.
Advent has had no trouble lining up US$2.65bn in debt commitments to back its equity investment and refinance existing debt.
NOT DONE YET
Recent deals such as Xylem’s US$1.7bn take-out of Sensus USA and Teleperformance’s US$1.5bn purchase of Language Line also removed two private equity-backed companies from the IPO queue.
Another option is the dividend recap, used by CD&R in the SiteOne deal, in which private equity firms recapitalise to pay themselves a dividend and draw out some return.
But only a few recap deals have crossed the line this year.
Apollo-owned McGraw-Hill Global Education successfully brought a bond and loan package to market in April that included a small dividend recap component.
A month earlier, however, transportation company TRAC Intermodal failed to lure investors into a new bond sale that would have mostly financed a dividend to its private equity owner Fortress Investment Group.
Even while the outright sale approach gains traction, the IPO track remains a viable exit plan as buyers become more amenable to higher prices and leverage multiples.
“It is a marriage of two objectives,” said Neil Mitchell, head of financial sponsors ECM origination at Credit Suisse.
“The buyside needs new investment ideas that generate alpha. And sponsors want to sell while reference stocks are trading at premium valuations.”
Photo: Hundred dollar bills are counted. Reuters/Amr Abdallah Dalsh