PE’s Hazardous Trip Through The IPO Exit Door

In a recent interview, Jean-Pierre Conte, top kick at Genstar Capital, assessed the long slate of expensive, high-profile acquisitions engineered by private equity clubs over the last year and pinpointed the flip side of the trend: “How are they going to exit?” Probably, we agreed, through IPOs. Giants like HCA, Clear Channel Communications and Harrah’s may be tough sells to corporate buyers because of sheer size and the alternative acquisition route—assembling another PE club that can afford the outsized price tag—is complex and time consuming. However, Conte, who steered two Genstar portfolio companies to public ownership last year, confirmed an open secret in the PE world. Although LBO funds tap the equity well with considerable frequency—39 portfolio companies taken public in 2006 alone—Conte says they really don’t like the IPO as an exit vehicle. It takes a long time to execute, puts PE players in the somewhat uncomfortable role of having to sell their deals to public investors, and really isn’t an exit—but a way to ease the debt load. And let’s not forget that the IPO market can turn frigid any time and block anybody from selling stock. Some veterans who know both the IPO and M&A markets insist that in many cases registering a public offering is really an advertisement that the company is for sale. The prospectus is the seller’s black book, and there’s a general belief that because the contents have to get by the SEC they are more complete and forthcoming than a non-official selling circular. These knowledgeable players maintain that it’s common practice for PE and corporate buyers to cull the IPO filings and cherry pick the companies that appeal to them. In fact, a few deals each year originate from the registration list including four that were being marketed by PE owners last year. Strategic buyers bought two when Caterpillar acquired Progress Rail and CenturyTel purchased Madison River Communications while PE buyers accounted for the others—Permira Advisors buying Aearo Technologies and Apollo buying Rexnord Global. Early in the new year, First Reserve agreed to acquire Brand Energy & Infrastructure Services from J.P. Morgan Capital Partners. Why aren’t there more? Haven’t heard a precise reason yet, except a suggestion that some prospective buyers might be turned off by the overhanging leverage. Or maybe some just aren’t worth buying once they’re examined closely. –Marty Sikora