Friday Letter: IPO Pain

It is a brave man that pushes ahead with a flotation of a portfolio company in today’s volatile equity markets. In London, at least three initial public offerings have been publicly pulled or tempered in the last few weeks. Who knows how many have been mulled and abandoned before they even received the oxygen of publicity?  

Yesterday joint sponsors Bridgepoint and AlpInvest decided with the management of Medica France, a retirement home operator, to turn its back on a public quote for now and to re-investigate that company’s exit options.

Medica may ultimately decide to push ahead with a listing, though perhaps a more likely choice in the short term will be to resuscitate its dual-track process and look at strategic and financial buyers instead.

Either way the setback is frustrating. As one banker close to Medica France’s backers said: “You can do all the work you like, growing the company, developing the management and priming the market. But the one thing you cannot control is the market. It is ridiculous that buyouts, so predicated on control and the alignment of interest, can be so at the mercy of markets over which we hold no sway.”

It is not all outright bad news however; there have been a few mitigated successes.

For example, the gamble to float companies in volatile markets has paid off for Demag Cranes, a German crane manufacturer, and ClinPhone, a UK clinical trials database specialist, as both traded up on their market debut. Both had private equity backing.

But Demag Cranes, a Kohlberg Kravis Roberts portfolio firm, had originally looked to raise more than €450 million. In the event, it decided it could only get the deal away with a cut in the offer price and number of shares sold. What came to pass was a more modest fundraising worth around €270 million.

ClinPhone, which analyses data from clinical trials for pharmaceutical clients and is owned by Montagu Private Equity and HgCapital, was so nervous about adverse publicity that it embarked on IPO by stealth. It consciously avoided publicity to take the pressure off the company lest it decide to change course in the process.

Some general partners wonder why anyone is bothering to float in the first place when record leverage levels are creating a viable alternative to public markets in the secondary buyout. Of course people businesses are harder to leverage than hard assets, which is why in the current environment, perhaps perversely, a private equity fund float should really be the only asset to fly in an IPO – hence all the fuss about the prospects of “permanent capital” for private equity at the moment.

But perhaps it is wise to expect the worst in the current climate. Certainly most of the big-brand, mega-fund firms appear to be taking their own medicine and postponing plans to float funds until markets stabilise – if only to give investors time to recover from the pain that KKR’s post-float performance on Euronext Amsterdam has inflicted.