Private equity firms may still be struggling to access capital for new funds. However, they are aggressively laying the groundwork for cashing out of earlier deals.
As the IPO market slowly recovers, private equity-backed deals are picking up as well. So far this year, 10 PE-sponsored companies have gone public, raising $2.2 billion, according to Greenwich, Connecticut-based Renaissance Capital. This works out to 27 percent of the 37 total IPOs completed so far this year.
Whats more, PE deals have accounted for 40 percent of the total IPO-related proceeds this year since these are typically larger deals. Last year, 22 of the 63 total IPOs, or 35 percent of the total number, were private equity backed deals, according to Renaissance.
Investors are more comfortable with PE deals, says Kathy Smith, chairman of Renaissance. She says investors figure the best holdings are coming out of the PE portfolios these days as the generally shaky IPO market tries to regain some stability. And these deals are typically larger than non PE-backed IPOs.
So far, the private equity sponsors are not selling any of their holdings, says Adley Bowden, managing editor at PitchBook. Mostly, the companies going public from the PE portfolios are using the proceeds of the offerings to pay down debt.
However, we all know this is a prelude to a big payday for PE sponsors. What they want to do now is establish a public market value and watch how their stocks perform for a few months. If they go up, look for the PE firms to quietly do follow-on offerings, this time selling mostly their own shares of the company.
After all, PE firms make their big money selling their stock once the company they own goes public, selling the company altogether or issuing a huge one-time dividend, usually with borrowed money.
So far, however, these deals have enjoyed mixed success.
For example, PitchBook points out that of the nine PE-backed IPOs it counted for the first quarter (it does not count a Canadian companys IPO), only one company Apollo Investment Managements Metals USA priced its offering above its range. Five priced within their range, two of which were at the high end of their range. Three IPOs priced below their range, all by $2 per share.
In addition, three of the nine companies that went public cut the number of shares from what they earlier planned, one raised the size of its offering and the remaining five were able to sell the number of shares they had planned.
So far, their stocks have fared modestly. The 10 PE-backed IPOs in 2010 are up 4.8 percent through April compared with 6.4 percent for the Renaissance index (this is not the same Renaissance as the company based in Russia with the same name).
In 2009, the average return of the PE-backed IPOs was 26.5 percent compared to 16 percent for all IPOs. However, this is a simple calculation averaging the performance of all deals and is not market cap weighted.
The Renaissance IPO Index was up nearly 55 percent last year. However, this Index includes all institutionally-investable IPOs, capturing over 95 percent of the U.S. IPO market and constituents exit after two years. The PE IPOs are calculated in this manner.
Looking ahead, PitchBook recently noted that at least another 39 private equity-backed companies are currently in registration for IPOs. Altogether, these companies are looking to raise nearly $8.5 billion through their offerings. Which means one thing: Big pay-days for the private equity sponsors are just around the corner, whether or not they are able to raise new money.
Stephen Taub, who has covered the hedge fund industry for 30 years, is a contributing editor to Institutional Investor and Absolute Return-Alpha magazines.