IPOs On The Rise As JOBS Act Kicks In

  • At least 18 PE-backed IPOs YTD
  • A flurry of PE-backed secondary offering
  • JOBS Act offers confidentiality

Data from Buyouts publisher Thomson Reuters shows at least 18 sponsor-backed companies have gone public in the first two quarters of this year as of May 21, up from just seven in the second half of 2011. At this rate, sponsors are well on pace to exceed the 22 private equity-backed IPOs in all of 2011, and on pace to match or exceed the 29 sponsor-backed IPOs in 2010, the most robust year since 2007, when at least 37 private equity backed companies went public..

Several factors are driving the action. The stock market has been relatively strong this year, with both the Dow Jones Industrial Average and the Standard & Poor 500 trending upward since October before settling back a bit in mid-May. My private equity firms need to generate returns ahead of fundraising campaigns. And the recently signed-into-law JOBS Act is allowing smaller companies to register to go public confidentially, reducing the scrutiny of investors and competitors. 

“The equity markets have had a decent run here over the last year or two,” Bill Sanders, global co-head of the financial sponsors group at Morgan Stanley, told Buyouts. “I think people are looking for liquidity. They need to return capital to LPs.”

Examples abound. In May alone at least six private equity-backed companies filed to go public, completed an IPO or were reported to be planning an IPO filing. These include Intelsat Global Holdings, an operator of satellite services backed by a consortium including Silver Lake, which filed to raise up to $1.75 billion in an IPO; media content provider Getty Images, backed by Hellman & Friedman LLC, which reportedly has hired banks to prepare an IPO that could value it at $4 billion; and restaurant chain operator CKE Restaurants Inc., backed by Apollo Global Management, which registered to raise $100 million in an IPO.  

These companies are very likely also pursuing “dual track” processes, in which they simultaneously entertain buyout offers. Successful exits of the above companies could bolster fundraising efforts. Silver Lake, for example, is in the market with its fourth fund; Hellman & Friedman invested in Getty Images from its sixth fund, a 2006 vintage, and it closed its seventh and most recent back in 2009; and Apollo Global Management’s investment in CKE came out of its $14.7 billion seventh fund, closed in 2008, and the firm is gearing up to raise its eighth buyout fund, as blog affiliate peHUB reported in April.

Some private equity-backed companies are taking advantage of a provision in the American JOBS Act that allows companies with total annual gross revenues of less than $1 billion to confidentially register with the Securities and Exchange Commission to go public. Dining café chain Cheddars Casual Café, which Catterton Partners and Oak Investment Partners bought in 2006, recently did so, sister news wire service Reuters reported.

The new law allows private companies to withhold sensitive financial information—such as gross margins and customers—until much later in the process or not at all, if the company ultimately decides not to go public. Thus it curbs the risk of divulging financials without the benefit of actually going public and the embarrassment should a public offering not prove attractive to investors. “That’s a much more manageable risk,” said Bob Clarkson, a partner in the capital markets practice with the law firm Jones Day.

Meanwhile, a number of LBO shops have taken advantage of the market to sell down stakes in public companies whose share prices have bloomed since going public.

Department store chain Gordmans Stores Inc. on May 21 announced that an affiliate of Sun Capital Partners had sold 3 million shares in the company it acquired in 2008 and took public in 2010 at $11 a share. The company’s stock was trading as high as $17.57 per share on the afternoon of May 25.

Under Sun Capital, the company lowered freight costs, invested in technology and increased cash flow by improving inventory turnover, Jeff Magny, a vice president with the Boca Raton, Fla.-based firm, told Buyouts.  EBITDA at the company was $46.6 million for year ended April 28, up more than 327 percent from the $10.9 million of EBITDA for the year ended Jan. 31, 2009, according to Capital IQ. Sun Capital invested in the company out of its fifth and most recent fund, a $5 billion pool raised in 2007, though Magny said fundraising concerns did not factor in the decision to sell shares in Gordmans.

“From the time we went public to today, we were able to further improve profitability, which makes the stock very attractive,” Magny told Buyouts.   

Oaktree Capital Management sold more than 3.6 million shares in Spirit Airlines at $22.51 a share, almost 50 percent higher than its debut offering price of $12 a share in its May 2011 IPO. And Clayton Dubilier & Rice, which bought a 47 percent stake in Sally Beauty Holdings from the Alberto Culver Co. back in 2006, sold 15 million shares in the beauty supplies company for $26.49 per share, an increase of more than 260 percent from its opening share price $7.35 as a new public company in November of 2006. EBITDA at Sally Beauty increased to $536.4 million for the year ended March 31, from $259.7 million at the time private equity firm invested in the company, according to Capital IQ.

“It was at a point where we thought we’d transformed the company and the markets were recognizing that,” a source close to Clayton Dubilier & Rice told Buyouts.