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PE Exits Fall to Early 2010 Levels

IPOs may be a viable means of cashing out, but current conditions favor bigger deals.

Private equity firms are having trouble cashing out of their deals.

Total PE exits fell in the fourth quarter from the prior three-month period. Altogether, London–based data expert Preqin has counted 170 exits completed so far during the December period with a total value of $28.4 billion, the lowest quarterly total since the first quarter of 2010. In the second quarter of this year, 326 exits were completed, worth a combined $121.8 billion.

Preqin expects the environment for cashing out on deals to remain rough thanks to the sovereign debt crisis, which it says is impacting buyouts and the fundraising market. Preqin says the fragile global economy has resulted in a weaker acquisition market, making it harder for PE companies to sell their holdings to operating companies. Other PE firms—another traditional source of buyers—are not as active in the acquisition market either. The lack of available debt financing to leverage potential acquisitions or debt recapitalizations is also crimping PE exits.

The initial public offering (IPO) market is helping bigger firms exit bigger deals. Pitchbook counts 29 private equity-sponsored IPOs this year, raising $16.9 billion. This compares with 40 IPOs raising $8.1 billion in 2010 and much lower totals in 2009 and 2008. The best overall year was 2006 when 66 PE-sponsored IPOs raised $22.8 billion, according to Pitchbook. “The public markets are becoming a better possibility for private equity firms,” says Adley Bowden, research director for Pitchbook.

He stresses, however, that the IPO market is more conducive for the larger, brand names deals that came to market, including HCA Holdings, which raised about $3.8 billion; Kinder Morgan, which raised $2.9 billion; and The Nielsen Co., which raised $1.6 billion. They combined for nearly half this year’s deal value for PE-sponsored IPOs.

In some cases selling shareholders cashed out some of their holdings in the deal. In the HCA IPO, for example, insiders accounted for about two-thirds of the total shares sold. In one of the two deals completed last week, Mid-Con Energy Partners LP said it would use some of the proceeds to acquire Mid-Con predecessor firms still owned by the private equity firm Yorktown Partners LLC, its majority owner.

In the other deal completed last week, Laredo Petroleum Holdings used the entire proceeds of nearly $300 million to repay its outstanding debt under its revolving credit facility.

Elsewhere, PE firms have to hope the market will improve. Going forward, Pitchbook figures 75 PE-backed IPOs are in the pipeline. Says Howard Friedman, a PwC partner specializing in IPO execution, “Financial sponsors continue to see this as a viable exit strategy.”

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