For private-equity companies that had been counting on being able to sell portfolio companies via a public offering, the downturn in the IPO market could not have come at a worse time.
Widespread worries about sovereign debt in Europe have dramatically slowed down IPO issuance in recent months. From May 17 to May 28, only three IPOs came to market in the United States, raising $210 million, according to Ipreo Capital Markets Analytics. And the backlog of deals in registration waiting to come to market has grown to more than 100.
Last month’s worldwide equity capital markets activity dropped 49% from April, to $30.6 billion, according to Thomson Reuters. That was the lowest level since February 2009, when the credit markets were still feeling the effects of the Lehman Brothers bankruptcy filing.
Companies often wait to hold their IPOs under ideal conditions: when they are operating well, the financial sponsors have grown their value and the market conditions are favorable. In difficult markets, private-equity firms have been known to wait an extra year or even two to monetize an asset with an IPO.
“You wait a year or a period of time before the marketplace is settled and you take it out then…I would say many private equity firms operate that way,” said Charles Giancarlo, managing director at Silver Lake Partners. “Some of them may feel more pressure from their limited partners to create more liquidity, more returns. Of course, it’s disappointing when the market is unsettled. But for many private equity sponsors that we work with, the philosophy is similar: that you take a company out at the right time for that company.”
Even with successful IPOs and positive after-market performance, it often takes an additional six months or a year for financial sponsors to completely cash out, because of lockup periods or the need to wait for the market to absorb the issue. Taking a portfolio company public too soon can hurt a firm’s reputation.
“Taking a company public is not a panacea for private equity holders … For the most part, they are long-term holders and they have to take a long term perspective, and I think most do.” Giancarlo said.
A bunch of deals have been pulled off the market in recent weeks. On May 25, NewPage Group Inc., a paper products company, withdrew its $805 million offering. Two similar announcements were made May 6. Because of market conditions , Ryerson Holding Corp., a metals manufacturer, withdrew its $400 million IPO, and Americold Realty Trust, a real estate investment trust focused on the temperature-controlled storage market, postponed its $600 million offering, according to Ipreo.
“When you have a more volatile environment and things happen outside of your control, so to speak, people tend to keep moving forward on documentation to get ready to go if things improve,” said Pete Chapman, co-head of Americas equity capital markets at Bank of America Merrill Lynch. “Over the last several weeks as it has gotten more choppy and it’s been a little more challenging in the marketplace in general, the private equity firms, the financial sponsors, have continued to stay focused on getting prepared.”
Participants say that the best timing for an IPO is during rising markets, but in this environment, it seems only the biggest, well-operated companies looking to make a public offering can tap the market.
For example, in May, Nielsen Holdings BV, the company best known for its television audience rating system, filed paperwork with regulators for a $1.75 billion IPO. A group of private-equity firms, including Blackstone Group, Carlyle Group, Kohlberg Kravis Roberts and Thomas H. Lee Partners, bought Nielsen for $10 billion in 2006.
Toys R Us, hoping to raise $800 million, filed its IPO on May 27. A day later, the Portland, Ore., information technology company Tripwire filed for a $300 million offering.
On May 7, the health care provider HCA Inc. filed for a $4.6 billion IPO. HCA is backed by the private-equity firms KKR and Bain Capital, which were part of a group that bought it in November 2006. On April 16, NXP Semiconductors NV, a portfolio company of KKR and Bain, filed for an offering of up to $1.15 billion. KKR and Bain, along with Apax Partners, bought NXP in 2006.
“Some of the high-quality companies with good operating models are still going to be able to tap the market under existing market conditions, but the ones that are slow growers, are GDP dependent, or are highly leveraged will probably have more challenges,” said Brad Miller, global co-head of equity capital markets syndicate at Deutsche Bank. “We need to see some of the higher quality names get out and float successfully as public entities before the smaller mid-tier companies are able tap the market.”
Josh Lerner, a professor at Harvard Business School, said the public markets have elements of unpredictability and irrationality and companies’ opportunities to access the markets are influenced by conditions unrelated to their businesses.
Over the past decade, the private-equity industry “has become more dependent on IPOs as a means to exit investment, which has translated into more cyclicality and more dependence on the whims and flows of the public markets,” Lerner said.
Global debt capital markets activity totaled $209.8 billion in May, the lowest since the onset of the financial crisis in October 2008, according to Thomson Reuters.
Private-equity firms, which used leveraged buyouts to pick up companies in the middle of the last decade, are finding their portfolio companies vulnerable to higher debt costs, which make them less suitable for the public markets, according to participants.
“Obviously, access to cost-effective debt capital is part of the equation driving higher valuations and exits, and that piece of the equation has been made more problematic by some of the concerns in Europe and whether there is going to be a double-dip recession,” said David Weild, capital markets adviser at Grant Thornton and former vice chairman of the Nasdaq. “The weaker economic outlook in the US increases risk on highly leveraged private-equity transactions, which causes lenders to demand higher financing costs. … Portfolio company earnings thus are hurt on both ends — lower company revenues plus higher financing costs. The loss of revenue and earnings momentum makes these companies less attractive as IPO candidates.”