FORTUNE — I recently wrote about private equity’s golden hangover, or the glut of large-cap companies that remain in PE portfolios after being acquired between 2005 and 2008. Conventional wisdom is that many of these companies are planning 2013 IPOs, but such offerings can face serious challenges. Namely, that capital raise targets are tied tightly to debt repayment.
Here’s what I mean: Imagine a company has $5 billion in long-term debt and files for a $2 billion IPO, with all of the proceeds earmarked for debt reduction. If the company raises $2 billion or more, all is good. But if the company only can fill $1.5 billion, prospective buyers would be getting a company with a half billion dollars of extra debt on the books. It’s the sort of thing that could cause such folks to walk away, or insist on a much lower price per share. At the very least, it severely reduces issuer flexibility.
One strategy I’m hearing about for easing this burden is to ask long-term public equity investors – the Fidelity Investments and T. Rowe Prices (TROW) of the world – for large pre-IPO capital infusions that are used to preemptively repay debt. These would be investors who otherwise would buy at IPO, but now they get to come in early at a 10% or 15% discount (plus equity re-pricing triggers related to any changes in IPO timing). Suddenly, the issuer and its private equity sponsors have some more IPO wiggle-room.
Yes, this does sound a bit like a shell game (since the buyer planned to come in later anyway, and now won’t buy shares at IPO). But it should make the issuer more attractive to other buyers, because the issuer has less debt. Moreover, it gives the company more of a fighting chance to list.
I’m told this strategy has been employed at least once so far, and that a number of large buyout firms are beginning to consider it. Could be a major trend to watch, particularly as the golden hangover begins to subside next year…
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