LBO exits dwindle as education IPOs soar

The exit market for U.S.-based LBO shops remained stagnant in the second quarter, providing further evidence that buyout shops are holding onto investments longer, hoping for an improvement in overall economic conditions to help give valuations a lift.

While the IPO market got off to a promising start in the three-month period, it stalled quickly, illustrating that the pair of deals that made it to market were more indicative of the strength of the individual companies and their shared niche in education rather than any re-kindling of institutional interest in new offerings.

The only two splashes of the period were made by the IPOs of Bridgepoint Education Inc. and Rosetta Stone Inc. Both companies not only managed to complete their offerings after pricing their shares late in the first quarter, they’ve also seen their stocks post modest gains to trade well above their debut levels.

Bridgepoint Education debuted on the New York Stock Exchange on April 15, selling 13.5 million shares for $10.50 each. Warburg Pincus holds a majority stake in the San Diego-based provider of education services. Bridgepoint Education’s shares (NYSE: BPI) were trading up more 50% from its IPO price, based on its closing price of $16.28 a share on July 1.

(As a sidenote, Thomson Reuters, publisher of PE Week, and the National Venture Capital Association, classified Bridgepoint as a VC-backed company, not as a PE-backed company. Bridgepoint’s largest shareholder is Warburg Pincus, which held 89.3% of the shares prior to the IPO. Warburg sold just over 7 million shares in teh IPO for proceeds of about $74 million and still holds 36.6 million shares.)

Rosetta Stone Inc. began selling 6.25 million shares for $18 each, coming in above the anticipated price range of $15 to $17 a share. ABS Capital Partners and Norwest Equity Partners are the Arlington, Va.-based language software provider’s sponsors. Rosetta Stone’s shares (NYSE: RPT) were trading up nearly 50% above its IPO price, based on its closing price of $27.38 on July 1.

Since those two IPOs, however, the public market as an exit strategy for buyout shops has dried up. No other portfolio company has moved ahead with plans to go public.

In fact, a few portfolio companies pulled their IPO plans, including Fortress Investment Group’s SeaCastle Inc. subsidiary, which cancelled its proposed offering for a second time in May. The lessor of intermodal equipment didn’t disclose the reason for the withdrawal. SeaCastle had filed to go public in September 2007, but postponed the offering for the first time in January 2008 because of unfavorable market conditions.

M&A no better

Meanwhile, M&A exits have been scant, too, as there were only 29 transactions during the quarter that involved a private equity-backed company. The five with disclosed financial terms had an aggregate value of $929.7 million. In comparison, during the second quarter of last year, U.S.-based shops completed 38 exits through mergers and acquisition.

The largest M&A exit of the second quarter was Polaris Acquisition Corp.’s merger with Apollo Management’s Hughes Telematics Inc. unit, an Atlanta, Ga.-based maker of electronic devices for automobiles. The transaction has a rank value of $726.8 million. The combined company now operates under the Hughes Telematics name.

The Carlyle Group scored the next most valuable exit, selling Wall Street English, the Chinese unit of portfolio company Wall Street Institute, to Pearson PLC for $145 million. Wall Street Institute provides language instruction services.

Just two buyout firms were able to complete multiple exits during the period. GMAC Commercial Holding SPV was the leader on a transaction basis. It sold Capmark Service Ireland Ltd., Capmark Services UK Ltd. and Capmark Asset Management GmbH to Capita Group PLC, a provider of outsourcing services based in the United Kingdom. These three deals had an aggregate value of about $16 million. GMAC Commercial Holding SPV is co-managed by Goldman Sachs & Co. and Kohlberg Kravis Roberts & Co.

Carlyle was the only other firm with more than one exit. Besides the sale of Wall Street English, it was also able to find a buyer for the polyurethane systems house of its indirect subsidiary, Neochimiki SA, which is a Greek chemical manufacturer. Financial terms weren’t disclosed.