The excitement surrounding buyout-backed IPOs is heartening at best and over-hyped at worst. Even though companies have steadily filed for IPOs for the past ten weeks (the longest streak in more than a year), some industry professionals believe the market recovery won’t heal all private equity wounds.
“The idea that going public is a panacea for private equity guys is not really true,” said Dan O’ Donnell, the private equity chair at law firm Dechert LLP. Even with a successful portfolio company IPO, a buyout firm faces the same issues it did before, including frustrated limited partners, he said. That’s because an IPO does not translate directly to cash in the LP’s pocket the way a sale to a strategic buyer would.
“Absent a dividend recap, it’s unlikely that the sponsor will be able to do a direct cashout,” O’Donnell said. The private equity firm is typically left with a large, somewhat illiquid position that it will gradually exit over time.
Furthermore, many portfolio companies are raising money in the public markets with the initial aim of lightening their debt loads, rather than providing a windfall for their LBO owners.
An example is the IPO of health care revenue cycle management company Emdeon, backed by
Semiconductor company Avago Technologies, backed by
Still, even if the buyout firm doesn’t mint a return in the initial offering, the process of deleveraging can set the shop up for liquidity in the future. “Companies that use the IPO market primarily to delever typically have more challenging IPOs but they are in a better position to do secondary offerings going forward,” said Bill Kirsch, a partner at law firm Paul Hastings.
KKR may have found a way to have its exit and eat it too when it announced a proposed $750 million IPO of discount retailer Dollar General in late August. The amount being raised includes a special $200 million dividend to “existing shareholders,” meaning KKR,
The Dollar General IPO, and its special dividend for KKR, is an exception and not the rule for the current market environment, Dechert’s O’Donnell said, noting that the recovery of the IPO market is sector-specific. “(IPOs) are not the next new wave,” he said. “It’s really a small window for companies that are sector-appropriate.”
Those sectors include the discount retailing space that Dollar General plays in, as well as health care, energy, and infrastructure. According to a survey of IPO lawyers conducted by communications consultant Kreab Gavin Anderson Worldwide, health care and energy are likely to dominate the new issuers. It is widely anticipated that hospital operator HCA Inc. will file its intention to go public in the coming months. The company was taken private by