Game on in the public market

What a difference a year makes in the public markets, and what an opportunity at the moment for private equity sellers.

The recent IPO of satellite operator Inmarsat priced at the top of the range and was 10 times covered, trading up the next day by 17.6% and moving ahead of comparables with a 9.5 multiple on a 2005 P/E basis. Apax and Permira were the beneficiaries that time, but just a few weeks earlier KKR had scored another 10-fold oversubscription, selling down its stake in Germany’s MTU Aero Engines just 18 months after buying into the business.

The growing number of private equity owners lining up flotations on the back of these and other results suggests that most firms think these halcyon days will continue for some time.

Now PartyGaming, a no-asset company reminiscent of the boom, is on the brink of a market-shaping event that could usher in a further period of feast or perhaps presage famine. The world’s largest online poker forum is due to price an IPO that will value the business at over US$8bn. The float of 23% is likely to be the biggest IPO in the UK since Friends Provident raised US$2.7bn in 2001.

There has been speculation in the press that demand for the deal will be dampened because online gaming is illegal in the US. Bankers close to the deal said it was almost covered by the middle of this week, but the result will only become clear when the deal prices over the coming weekend. There are implications for private-equity backed companies that can be weighed ahead of pricing, however. And the extremes are as huge perhaps as the PartyGaming deal itself.

If an asset-light business such as PartyGaming can get away with such a high valuation, then it is open season in the public markets for VC sellers. In the micro sense that would surely help Doughty Hanson’s plans to float RHM at the third attempt. In the macro context, the typical disciplines, cash flows and manufacturing base should ensure that any private equity-backed company gets its place in the sun.

PartyGaming is also one to watch because, like many VC-backed IPOs, it is an all-secondary deal. The company founder stands to make a three-digit return on the back of a successful result.

However, if the PartyGaming flotation goes the other way and the deal falls flat, the result may be frustration for private equity owners, with increased selectivity from investors.

There are certainly some deal-specific elements at work here. Investors may decide that PartyGaming is simply not suitable for a listing because its business model generates cash but is light on capex. In that instance private equity could still make a silk purse out of a sow’s ear. It is not as if three or four firms teaming up could not afford to buy the company, and returns in the sector are running at around 50%.