Friday Letter Public consolation

This week has seen another raft of delayed auctions and postponed syndications. But amid the doom and gloom from the debt markets, there has also been some better news emerging for the beleaguered buyout industry.

A report from Dealogic this week revealed that private equity-backed IPO volume has hit record levels in the year to date – the $34.2 billion total is equivalent to 67 percent of the total for the whole of 2006, and a record for this stage of the year.

The news may seem surprising, given the public markets’ general ambivalence towards some of the sponsors themselves this year. Blackstone and Fortress continue to see their share prices languish in New York, while KKR and Apollo’s Euronext-listed funds are faring little better on the other side of the Atlantic.

But public market investors have clearly not lost their enthusiasm for private equity-owned assets. For every Debenhams (the UK retailer that has struggled since its owners returned it to the market), there’s a Cineworld – the Blackstone-owned cinema chain has seen its share price jump 23 percent since its twice-delayed flotation in April.

Indeed, no fewer than 111 sponsor-backed IPOs have got away successfully so far this year – 50 percent of which have been in the US, suggesting that rumours of its demise as an exit route have been greatly exaggerated. Europe also saw its share of activity, including four of the biggest five sponsor-backed IPOs – led by EQT’s €2.7 billion flotation of German engineering group Tognum in June.

Any correction in the debt markets might actually boost these numbers still further. For the last couple of years, private equity buyers have almost invariably been able to beat the price offered by the public markets. With the current credit problems affecting leverage multiples, valuations are likely to be more in line.

And the good news for buyout firms is that the window of opportunity appears to be still open, despite the recent sell-offs in the global equity markets. Yesterday, General Atlantic and Oak Hill revealed plans to list BPO firm Genpact in New York. Earlier this week Sepura, a UK-based radio maker backed by turnaround specialist Kelso Place, completed a successful flotation on the London Stock Exchange, pricing in the middle of its range to value itself at about £200 million – a multiple of about 16 times projected earnings for 2008.

“The fundamentals are healthy, particularly in the TMT markets”, one London-based financial sponsor head told PEO this week. “IPOs are still getting priced at realistic earnings multiples.”

This may not last, of course. Nobody is quite sure whether the recent skittishness in the equity markets represents a short-term wobble or a long-term trend, so sponsors may need to cash in while they still can. “It could be the beginning of a bigger slide; so those IPOs that are on the tracks want to go for it as soon as possible, while valuations remain attractive,” says Gareth Healy, head of the IPO advisory unit at Close Brothers Corporate Finance in London. Some firms are even looking at ‘hedge IPOs’, he adds – a partial flotation of a portfolio company early in the lifecycle of an investment to lock in the current valuations, while keeping a sizeable stake to benefit from the future upside.

But one thing seems clear: for now, the public markets are still definitely open for business. “This is probably the first wobble in a broader decline – but it’s not so bad that it’s stopped people doing IPOs,” says Healy. “The window certainly hasn’t shut at the moment.”

Some welcome good news in a difficult summer.