IPOs Remain Strong Thanks to Private Equity


September 30, 2015


The market turmoil over the summer has certainly received not just a number of big headlines, but also investors’ attention. The Chinese stock market suffered the deepest one-day drop of all times and the Dow Jones Industrial Average also plummeted by nearly as much as 1,000 points during the third quarter.


While the volatile market conditions have certainly played a part in private equity firms’ exit strategies, the firms have not completely turned their back on initial public offerings. One study suggested the IPO market might well be at an inflection point, while some analysts argue there hasn’t been a big slump in the numbers anyway.


Strength in US IPO Numbers


IPO numbers are especially strong in the US. According to a recent Wall Street Journal article, 26 companies filed for an IPO between August 24 and September 15 in the US. These companies were a mixture of private equity as well as non-private equity backed companies.


Furthermore, Dealogic’s data shows the public market appetite for IPOs has been strong in the region since 2013. Since then, 192 companies have gone public with the help of financial sponsors and there have been 481 follow-on offerings.


It hasn’t just been about volume either, as capital raised by the IPOs has been faring better than previously. The sponsor-backed IPOs raised $69.71 billion since 2013, with secondary offerings raising even more with $182.03 billion.


The US is still well on target to reach 200 IPOs in 2015. This would be the third consecutive year of doing so – the late 1990s was the last time this record was achieved.


Furthermore, even on the global level follow-on activity has remained strong. EY’s data for the first quarter of the year showed that while new listings slowed on a global scale, follow-on activity continued at a rapid pace. In fact, the first quarter saw the highest single quarter, in terms of money raised in follow-ons, on record.


China’s Suspension of IPOs Opened Up Opportunities


Even in China, were IPOs were suspended in early July in an effort to tackle the stock market volatility, China’s acquisition and merger activity hasn’t been damaged. Joe Callagher, head of Asia-Pacific M&A at Credit Suisse, said in a Financial Times interview, “Interest among private sector companies in particular is strong”.


Companies in the Asian market are looking for listings elsewhere, as well as exploring a sale to private equity as an option. This has provided plenty of opportunities for private equity firms to get rid off its dry powder.


Colin Banfield, head of Asia M&A at Citigroup, told the Financial Times, “Private equity has been sitting on the sidelines waiting for valuations to come down to more realistic levels, and that’s now happening”.


EY has predicted that private equity-backed IPOs could raise $12.5 billion on global scale this year.


Big IPOs on the Pipeline


The fourth quarter of 2015 could witness some big IPOs and private equity firms could well make billions in these deals. Among the big IPOs the First Data has been one of the most eagerly anticipated, not only for the reason that KKR has held on to the payment processor for eight years.


The private equity firm bought the company for $26 billion and while the suggested valuation of $3 billion might seem like a bad deal, the firm will make some money of this long-term investment. Although the Wall Street Journal did suggest the majority of the proceeds might go to reducing the enormous $21 billion debt bill.


Like First Data’s IPO, the proceeds of another listing by Albertsons might well be used for paying off existing debt. The company has announced it is going to sell around $2 billion in stock, after completing a mega-merger at the start of the year with Safeway. Cerberus, the private equity firm backing the supermarket chain will also take something home with the deal.


Finally, there’s also a big media IPO on the pipelines, with a group of private equity owners set to profit. Thomas H. Lee Partners, Providence Equity and TPG Capital are all preparing Univision, the Spanish-language broadcaster, to file an IPO. Although the firms initially filed in July, there hasn’t been much news on when the offering will take place.


While the above two listings are likely to proceed as planned, there are some deals in the pipeline that analysts remain sceptical about. Neiman Marcus could well be on its way to list and it’s not the first time the company has explored this option in recent years.


Private equity firms TPG Capital and Warburg Pincus bought the company in 2005 and considered an IPO filing before selling Neiman Marcus in 2013. Ares Capital and the Canada Public Pension Investment Board bought the company from the private equity firms for $5.1 billion and the current owners are now thinking their own exit opportunities.


The Other Side of the Coin


But the IPO analysis of Private Equity Analyst also points out the more concerning image. According to Ipreo Holdings data, the period from August 12 to September 15 resulted in no new US listings.


The fear is that while plans to list remain strong, many companies have ended up postponing or even going with another route. Certainly, with many private equity firms, the increased focus on the dual-track process has meant firms might file for an IPO, but will opt for a sale instead.


The problem for private equity firms in the current volatile market is about convincing the market over the viability of the company on offer. Many private equity-backed companies often come with a heavy debt burden and this is concerning to many investors.


Overall, there is some suggestion market volatility has not been a real reflection of the economic performance, certainly not of the US. John Neuner, the co-head of investment bank Harris Williams & Co. said in the Wall Street Journal piece how some of the market performance of recent weeks had been “a reaction to everything people saying should happen actually happening”. Neuner pointed out that, “From a fundamentalist standpoint, the U.S. economy continues to be strong”.


For private equity firms, the remaining months will be an interesting time to hone exit strategies. The markets could still witness a number of big listings.


If you want to find private equity deals, head down to DealMarket.

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