Strong first-day trading for two private equity portfolio companies in October may augur well for fourth quarter PE-backed initial public offerings. Real-estate services provider Realogy Holdings Corp. (NYSE: RLGY), best known for the Coldwell Banker and Century 21 brands and owned by Leon Black's Apollo Global Management LLC (NYSE: APO), surged 27 percent on Oct. 11, after pricing at the high end of its expected range.
Online photo service Shutterstock (NYSE: SSTK), which is backed by Insight Venture Partners, priced above its expected range and also traded up 27 percent on its debut the same day.
Not all signs were positive, though. Volatile public markets led some companies to switch gears. For example, Dave & Buster's Entertainment Inc., a portfolio company of Oak Hill Capital Partners, withdrew its IPO on Oct. 4.
By selling 40 million shares and raising $1.08 billion, Realogy provided the third largest initial public offering of 2012, behind the $16 billion IPO of Facebook Inc. (Nasdaq: FB) and the debut of Banco Santander's (NYSE: SAN) Mexican unit, which raised more than $4 billion.
Apollo took Parsippany, N.J.-based Realogy private for $6.8 billion in 2007, two years after home prices peaked. The New York private equity firm owned about 73 percent of the company before the IPO, a stake that shrank to about 50 percent in the transaction.
New York hedge fund Paulson & Co. owned 15 percent of Realogy before the public offering and 10 percent afterwards. Its president, John Paulson, made billions of dollars betting on the collapse of the market for mortgage-backed securities.
Realogy's IPO benefited from the fact that home prices have started to creep back up, after the worst housing market since the 1930s. The company provides real-estate franchising, brokerage, relocation and title services. Its franchise-system members operate approximately 13,500 offices in 103 countries.
The Realogy and Shutterstock IPOs leveraged momentum coming out of the third quarter. "PwC continues to see strong activity in financial sponsorbacked IPOs, with approximately 70 percent of the IPO volume in the third quarter and 77 percent of the IPOs, year-to-date," says Howard Friedman, partner, PwC US's transaction services practice. "IPOs of financial sponsor-backed companies have generated returns in excess of the market indices and slightly greater than non-sponsor backed companies overall."
The continued pipeline of new registrations is encouraging. "We expect this trend to continue in the fourth quarter and into the first quarter of 2013."