Needless to say, private equity firms tend to stick around after an IPO. A recent research report, “Private Equity Firms’ Reputational Concerns and the Costs of Debt Financing,” took a look at the growing number of U.S. private equity-backed IPOs over the past two decades. (From 2001 to 2011 the study found private equity firms as shareholders in just under a third of U.S. IPOs.) Written by Rongbing Huang of Kennesaw State University and Jay Ritter of University of Florida, the report found that “PE firms on average own more than 15 percent of the sample company’s equity five years after the IPO.”
Apollo Global Management and TPG Capital retained all their shares in the Norwegian Cruise Lines IPO (see accompanying table). Bain Capital did not sell shares in the Bright Horizons IPO. That’s despite solid demand for shares: Norwegian Cruise Line priced higher than expected, as did Bright Horizons. Kevin Sheehan, Norwegian Cruise Line’s CEO, said in a recent interview that his private-equity backers are “very excited about where we are. … They’re not selling shares.”
Still, not selling any shares at all in the IPO appears to be the exception. Sponsors typically use the IPO to reduce their investment and repay limited partners. Said Doug Baird, chairman of equity capital markets at Citigroup: “It’s not their job to own shares of publicly traded companies. … These people are natural sellers over time of everything they own.”
Private equity research firm Privco found that over the past three years buyout sponsors sold shares in 78 percent of private equity-backed IPOs in the United States. Sam Hamadeh, CEO of Privco, said that IPOs where no private equity shares are sold often “involved distressed IPOs where the offering size was reduced.” If investor demand is lower than anticipated, insiders like private-equity backers and management are often the first to pull their shares.
Recently, Starwood Capital Group sold 20.5 percent of its holdings in the TRI Pointe Homes IPO. This is similar to the 21.1 percent stake that The Blackstone Group sold in December’s PBF Energy IPO. Goode Partners reduced its stake by nearly half in last year’s Chuy’s Holdings IPO.
Privco’s Hamadeh said that in general, “PE firms will sell as much of their shares as possible into the IPO—as [much as] the IPO market will accept.” Among the constraints: 180-day lock-up periods that prevent large shareholders from selling their stakes all at once, according to Jay Clayton, a partner at the law firm Sullivan & Cromwell.
Just when sponsors end up fully exiting company post-IPO seems to vary widely.
THL Partners liquidated its investment in Dunkin’ Brands in June 2012, about a year after the June 2011 IPO. By contrast, more than two years after the IPO of hospital manager HCA Holdings Bain Capital and Kohlberg Kravis Roberts & Co. still hold significant stakes—and they will continue to even after they and fellow investors follow through on plans to sell some 50 million shares. (Shares were recently trading at $37.22 a share, suggesting proceeds of $1.86 billion.)
The timing of sales often hinges on public demand for shares, as well as how soon sponsors need to provide capital to their limited partners. Jeffrey Bunder, global private equity leader for accounting firm Ernst & Young, said that “firms are generally walking a fine line between selling down their stakes too quickly, which can unnecessarily depress share prices, and holding onto them for too long, which exposes LPs to excess market risk and is generally inconsistent with their mandate as private market investors.”
Buyout firms also have their reputations with lenders to think of. Absconding after an IPO could leave a bad taste in the mouths of creditors, particularly if the company’s fortunes take a turn for the worse. In looking at annual reports post-IPO, the University of Florida study found that “for about 90 percent of the companies at the second proxy statement after the IPO, and for about 60 percent of the companies at the fifth proxy statement, PE firms still have at least one director on the board of a sponsored company.”
Katie Roof is a contributor to Buyouts.