Big story about private equity-backed IPOs on C1 of today’s WSJ, with new issues like Nielsen and Demand Media expected to price this week. Here’s the lead:
“What private-equity honchos once received from initial public offerings: instant cash, heady gains and quick exits from their investments. What they likely will get from a coming surge of IPOs: muted initial gains, help reducing staggering debt loads and hope of finally handing some cash back to investors.”
I agree with the second part, but have some serious problems with the first part.
It is false to claim that private equity firms use IPOs as “quick exits” from their investments. Instead, private equity firms usually sell few of their shares via IPO, instead slowly bleeding out over subsequent months and years (once lock-up provisions expire).
To illustrate my point, take a look at what happened in the five largest PE-backed IPOs that priced during 2005 and 2006:
- Spirit AeroSystems Holdings
The company offered around 10.42 million shares in the IPO, while financial sponsors like Onex Corp. offered the remaining 44.67 million shares. This is the only example on this list where the Journal’s “instant cash” thesis seems to hold, but the “quick exit” issue remains problematic. Onex retained a majority voting stake in SPR following the IPO, and spent several subsequent years selling off chunks of SPR stock.
- Huntsman Corp.
More than 55 million of the IPO’s 60 million shares were offered by the company, while the remaining 4.5 million shares were offered by financial sponsor MatlinPatterson and company management.
- Hertz Global Holdings
All 88.26 million IPO shares were offered by the company, which raised over $1.32 billion. None were offered by financial sponsors The Carlyle Group, Clayton Dubilier & Rice or Merrill Lynch Private Equity. That said, a majority of the proceeds were used to repay a loan previously taken out to pay a $1 billion sponsor dividend. In other words, the PE firms generated “instant cash” prior to the IPO — not through it.
- Warner Chilcott PLC
All 70.6 million IPO shares were offered by the company, which raised around $1.06 billion. None were offered by financial sponsors Bain Capital, THL Partners, JPMorgan Partners or DLJ Merchant Banking.
- PanAmSat Holding Corp.
All 50 million IPO shares were offered by the company, which raised $900 million. None were offered by financial sponsors KKR, Carlyle Group of Providence Equity Partners.
To be clear, I’m not saying that private equity firms don’t make money from taking their portfolio companies public. And I acknowledge that some of the aforementioned offerings triggered special payments to financial sponsors, for premature termination of private management contracts. But, for the most part, PE-backed IPOs are a means toward return on investment — not the end.