Buyout stragglers are finding their primary exit to cashing out impeded. Blackstone, Carlyle, KKR and their peers have had a good run returning heavily indebted portfolio companies to public stock markets. But the lingering crop of initial public offerings is now struggling to squeeze out. It bodes poorly for the private equity industry when selling is as tough as buying.
Choppy markets around the world have frightened investors into becoming more risk-averse. For the last couple years, they have blissfully looked past the high leverage levels at the likes of U.S. art-supplies chain Michaels and TV ratings company Nielsen, and gobbled up the newly available shares. Later arrivals are facing greater scrutiny. From March to July, the percentage of IPOs pricing below the indicated price range was in the teens, Thomson Reuters data show. That went up to 50 percent in September and 75 percent so far this month.
Luxury retailer Neiman Marcus, jointly owned by private equity shop Ares Management and Canada’s largest pension fund, this week postponed its public listing until next year. Albertsons, the U.S. supermarkets chain owned by Cerberus, also delayed its near-$2 billion public offering this week, in part because rival Wal-Mart Stores took a beating after forecasting lower profitability ahead.
KKR plowed ahead with the year’s biggest flotation, of payments processor First Data, but at a discounted price. It could make it harder for buyout firms to proceed with some of the biggest IPOs this year, including for pet supplies retailer Petco and Spanish-language broadcaster Univision.
The news isn’t all bad, of course. Worldpay, the UK payments processor owned by Advent International and Bain Capital, got its share sale away at a healthy valuation this week. And Blackstone’s Performance Food Group has enjoyed a 16 percent pop since going public earlier this month. Even so, if the IPO window is closing, it could leave private equity firms in an awkward spot.
They have been backing up truckloads of cash to investors in their funds, which have turned around and pledged much of it to new buyout vehicles. In the second quarter, for example, Carlyle handed back four times as much as it invested. It hasn’t been easy to find acquisitions, especially with corporate buyers acting so aggressively. It took almost the last three years to equal the same volume of LBOs worldwide as in the second quarter of 2007 alone, according to Thomson Reuters data.
In theory, the same downturn that makes markets unwelcoming to IPOs should lead to buying opportunities. The theory didn’t hold up in the aftermath of the financial crisis, however. For now, the uncertain market conditions could leave private equity firms feeling boxed in.