In IPO Horse Race, Some=
Push
Their Steeds Hard
By Shasha Dai
12/1/2009
Buyout firms are tripping over themselves in their haste to take portfolio
companies public.
Since the public markets reopened to initial public offerings earlier this
year, buyout-backed companies have made up a disproportionately large
percentage of those lining up at the starting gates. Some firms seem to be =
in
such a rush to get companies through the window before it slams shut that t=
hey
are filing incomplete IPO registration statements with the Securities and
Exchange Commission. Team Health Holdings LLC and Graham Packaging Co., both
backed by Blackstone Group, and Freedom Group Inc., backed by Cerberus Capi=
tal
Management, named neither a listing exchange nor their underwriters in their
first SEC filings in October.
"Private equity firms are taking their best companies public as soon as
they can," said Paul Salem, co-founder of Providence Equity Partners
which, along with others, took college operator Education Management Corp. =
public
earlier this year. "The window will compress [again]."
After a year or so in which liquidity was difficult to achieve, sponsors' r=
ace
to the public markets is understandable. Some of them need to return cash to
demanding limited partners, while others are using willing equity markets to
improve the health of companies by slashing debt levels that, in the
post-Lehman Brothers Holdings Inc. world, are simply too high and hard to
refinance otherwise.
But the haste with which they are moving - and the profits that some are
generating in conjunction with the IPOs - raise concern that they may be ac=
ting
too aggressively, and that if these offerings turn out poorly in the long r=
un,
the industry could do itself real damage.
"It is a concern because there are investors who pay attention to
sponsors," and they will remember those that bring bad deals to market,
said Nick Einhorn, research analyst at IPO rese=
arch
firm Renaissance Capital.
Ahead In The Early Going
Statistics show that PE-backed companies, and buyout-backed companies in
particular, constitute a particularly active part of the
According to data provider Dealogic, buyout-bac=
ked
companies account for 39% of all U.S. IPOs so far this year, compared with =
16%
for all of 2008 and approaching the full-year record of 43% set in 2002,
according to Dealogic. Globally, the trend is l=
ess
pronounced, but the data still shows an increase this year over last, to 8%=
of
total IPOs from 7%.
Generally, buyout-backed companies that have gone public in the
Even among the most aggressive sponsors - those that sell down their stakes=
at
the IPO, a move sometimes seen by public market investors as a sign that the
smart money is getting out - returns look solid. Buyout firm portfolio
companies with sponsors who sold shares have turned in a positive post-IPO
performance 58% of the time this year so far, our analysis shows.
One of the most aggressive offerings this year has come from Kohlberg Kravis
Roberts & Co. in the IPO of Dollar General Corp. Before the IPO, the fi=
rm
took a $239 million dividend, and together with co-investors sold at least =
11.4
million shares in the 34.1 million share offering, reaping at least $240
million in proceeds before fees. Dollar General priced at the bottom end of=
its
planned range, although its shares have since traded up.
The sell-down delivered some welcome cash to KKR's
most recent buyout fund. But KKR said in general it feels no pressure to
generate liquidity and that it is more inclined to use proceeds from IPOs t=
o delever the balance sheets of portfolio companies. In=
deed,
most of the proceeds the company itself generated from the IPO went for just
this purpose. "[Limited partners] like to see cash, but we haven't hea=
rd
noise on that front recently," KKR executive Scott Nuttall
said during a recent conference call.
There have been problems related to a few specific IPOs. Shares of medical
device maker AGA Medical Holdings Inc., backed by Welsh Carson Anderson &am=
p;
Stowe, and Addus HomeCare<=
/span>
Corp., backed by Eos Partners, both priced below their expected ranges, and
both have drifted down since. Backers didn't sell shares of either in their
IPOs, and analysts said factors other than their buyout ownership are prima=
rily
to blame for the poor performances. Scott Sweet, senior managing partner of=
IPO
Boutique, said uncertainty about AGA getting approval for a new device play=
ed a
role, as did pending health-care reform that promises to limit Medicare
reimbursements for the device. Some of the same factors are at play for ano=
ther
health-care company, Addus Homecare, whose in-h=
ome
care services are expected to be negatively impacted by health-care reform =
as
well, said Renaissance Capital's Einhorn.
In the case of railroad operator RailAmerica In=
c.,
backed by Fortress Investment Group, sponsor behavior did play a role, one
analyst said. RailAmerica also priced below its
expected range and has traded down since, in part because it was priced too
richly, said Sweet. Short-line operator Genesee & Wyoming Inc. sells at
about a 17 times trailing price-to-earnings ratio, while RailAmerica
sold at 50 times, which Sweet said is "out of whack." He also said
that Fortress was too aggressive, as it sold more than half the shares in t=
he IPO,
increasing the number even as the price fell to make up the difference. Tha=
t's
"a huge red flag," Sweet said. Wes Edens,
co-chairman of Fortress, said on a recent conference call that the primary
motivation for the IPO was to generate capital for the company.
Some PE-backed IPOs haven't even made it out of the gate. Renaissance Capit=
al
reports that 42 IPOs have been withdrawn or postponed this year; 16 of which
are PE- or VC-backed. Among them are companies l=
ike
Apollo Management LP-backed Rexnord Holdings In=
c., a
power transmission equipment maker; Healthport =
Inc.,
an Abry Partners-backed health-care and informa=
tion
technology company; and Diamondback Energy Services Inc. and Rhino Resources
Inc., two energy companies backed by Wexford Capital. One, energy
infrastructure company AEI, withdrew its offering even after a restructurin=
g in
which private equity backer Ashmore Group PLC a=
greed
to sell far fewer shares than originally planned.
Einhorn said that in these cases, the underwrit=
ers or
sponsors may have gotten too aggressive on pricing, or the company may have
lacked a compelling story, but he said the same thing can happen to
non-PE-backed companies. Greg Ingram, co-director of equity capital markets=
at
investment banking firm Robert W. Baird & Co., agreed with that sentime=
nt.
"There is no distinction between PE- and non-PE-backed companies. We a=
re
certainly in the early days of a reopening or recovery of the IPO marketÉand [the volatility] is typical of early
days," he said.
Trouble In The Backstretch?
Nonetheless, these companies' long-term performance on =
the
public markets remains to be seen. Many of them still carry heavy de=
bt
loads despite using the proceeds of their IPOs to pay down debt, and warn in
their prospectuses that high leverage is a risk to their continued success.=
And
as more buyout-backed portfolio companies go public - and there will be man=
y,
given how many take-privates firms have engaged in over the past few years -
their performance will be closely watched.
The worry is that something akin to what happened to venture firms after the
tech bubble burst could afflict buyout firms, if these companies' heavy debt
loads should prove problematic down the road.
The venture industry did lasting damage to itself by pushing start-ups with
shaky business models into the public markets during the dot-com bubble,
although it had plenty of help from investment banks and a public infatuated
with Internet technology. A classic example is Webvan<=
/span>,
an online grocer whose backers included Benchmark Capital and Sequoia Capit=
al. Webvan went public in 1999, raising $375 million, but=
ran
out of money and failed two years later.
Failures such as this have made public market investors cautious about
investing in unproved start-ups without revenue or income even now, forcing
venture firms to hold onto their companies much longer, which can be seen in
exit statistics.
Through the 1990s, IPOs were a steady source of exits for venture firms, wi=
th
more than 100 annually in most years, even exceeding M&A exits
occasionally. Since 2000, however, the peak was 76 in 2007, after which the
global financial meltdown brought any hopes for a recovery to a halt once
again. Only nine IPOs through Nov. 20 came from venture firms in the
Buyout firms counter that their companies are mature, with proven business
models, and as such bear little resemblance to the revenue-less start-ups t=
hat
tormented so many public investors 10 years ago. But their debt loads remai=
n a
question, and if a double-dip recession were to occur, causing problems for=
a
disproportionate number of these companies, there could be a reckoning.
IPO Boutique's Sweet is only too aware of this issue, and said that as an
individual investor, he would rather buy shares of VC-backed companies than=
of
buyout-backed companies at present because of the heavy debt loads on the
latter. "Many times [private equity firms] turn these companies around=
and
flip them too quickly," Sweet said.
But John Rogers, an analyst at Moody's Investors Service, pointed to several
factors that he believes will limit any widespread problems among now-public
buyout-backed companies. For one, he said companies going public aren't amo=
ng
the most highly levered in PE firms' portfolios, and the IPO reduces the de=
bt
load further, making it even less likely they will run into trouble. Dollar
General, for instance, has leverage of some four times Ebitda
post-IPO, which "is not a lot," he said.
He added that when sponsors do try and take riskier companies public, inves=
tors
are showing less appetite for them. "The le=
ss
credit-risky the companies were, the more successful their IPOs were,"=
Only time will tell, but on a recent conference call, Blackstone's James sa=
id
sponsors taking a company public or unloading shares shouldn't be a sign to=
be
wary. "I don't think there's any signaling, because I don't think PE g=
uys
are in particular good readers of where the market is going," he said.
"The idea that we have a lot of insight into what public markets are d=
oing
is odd to us."
James, whose firm plans to take eight companies public over the next 18 mon=
ths,
added that "as long as private equity is offering quality companies wi=
th
quality management...those deals will be fine.
"It doesn't seem to us imprudent to derisk=
some
of these companies, delever them, take some mon=
ey off
the table and send some money back to our [limited partners]."
-With reporting by Lynn Cowan
Shasha Dai
Reporter
Dow Jones, a News Corp. company