Equity markets welcome VC issues

Against the backdrop of markets that have rapidly recovered from losses to reach new highs, exits using the equity markets are looking increasingly attractive for private equity sellers.

This is a rapid change considering the hangover from some high profile deals last year, such as the £950m IPO of Debenhams in May that has left investors nursing a 25% loss. The change shows how equity investors have ceased to look at private equity-owned firms any differently from entrepreneur or family-owned firms.

The recent IPO of French electrical equipment supplier Rexel did not see any selling by Clayton Dubilier & Rice, Eurazeo or Merrill Lynch Private Equity Partners, but the €1bn raised was to reduce debt.

The timing was challenging, coming just before the long Easter weekend, but the deal was completed at a 10% discount to peers. Bankers involved said that investors were doing a lot of work before investing and so were selective on the story and valuation, yet there was still plenty of demand for the right name.

This demand was shown by the disposal by CVC and Alpinvest of their combined 45.65% stake in Wavin in a one-day bookbuild. The Dutch pipe-maker struggled to complete its IPO in October 2006 with pricing at the bottom of the range and a cut in the shares offered.

Last week, with the stock up 40% from the IPO, ABN AMRO Rothschild and Fortis raised €524.5m in a block trade. The discount was just 4.2%, about half the level expected to clear that amount of stock. Investors were receptive to the complete sell-down to remove the overhang from further expected sales.

This attitude is increasingly pervading the equity market, where liquidity is crucial. On IPOs for small and mid-cap companies, investors are keen to see VCs sell stock in order to boost the free-float. This is a major change from only two years ago, when selling was seen to mean a desperate desire to exit and therefore a cause for concern.

With equity capital markets presently dominated by small and mid-cap offerings, a private equity owner is often a significant positive. The strength of management and experience of owners on floats mean the companies and IPOs are as well run as much larger peers.

This welcoming attitude has led to a bulging pipeline of private equity-backed IPOs. Leading that is Xchanging, which was due to price its IPO on Tuesday night, and could total up to £206m.

Also, Blackstone this week revived the IPO of UK cinema operator Cineworld having failed to price the deal in June 2006. The deal will be priced at the end of this week and reduce Blackstone’s stake to 50%.

Elsewhere, Goldman Sachs Capital Partners is selling stock worth up to €1.2bn in the IPO for Italian cable company Prysmian, which will see it achieve a market capitalisation of €3bn, and many more deals are expected to come before August.

The picture isn’t totally positive, however, as sellers must still be willing to accept the market’s views on valuations. ABN AMRO Capital had to abandon plans to IPO Finnish tableware company Iittala in March when pricing was only possible at the bottom of the €8.50–€10.50 price range. The seller wouldn’t accept less than €9.50. It was not clear whether the deal might have succeeded if €9.50 had been the bottom of the range.