Friday Letter To list or not to list

Private equity-backed IPO filings and floats are on the rise, but that doesn’t mean public markets will necessarily take over as a preferred exit route.

There’s palpable excitement over an IPO market finally showing signs of life.

“There’s definitely a lot of momentum in the market place in general,” Bob McCooey, NASDAQ’s head of new listings, told PEO this week. In terms of filings, listings and trading, the numbers are all on the rise compared to previous quarters.

“A window has opened up again that may enable certain higher quality companies to go public,” agrees Michael Littenberg, a Shulte Roth & Zabel partner that specialises in capital markets.

Kohlberg Kravis Roberts and Silver Lake demonstrated that this week with the successful listing of their Singaporean semiconductor company Avago, which yesterday priced at the top of its range and sold 20 percent more shares than its sponsors anticipated. It raised $648 million, making it the second largest US IPO in 2009 to date, and the company’s shares closed up nearly 8 percent on its first day of trading.

Fortress Investment Group and The Blackstone Group respectively said during earnings calls this week that they too are preparing to exit some portfolio companies via IPOs. RailAmerica, which  Fortress purchased for $1.1 billion in February 2007, last week registered to sell up to $300 million in shares in an IPO on the New York Stock Exchange.

Mid-market firms are keen to get in on the action, too. Last month 3TS Partners-backed LogMeIn successfully listed on NASDAQ, raising $100 million, while this week, Spectrum Equity Investors filed for a $67 million IPO of Ancestry.com.

All of this, to be sure, is encouraging.

But it remains to be seen whether or not it signals exits via public listings may be gaining preference – or, as those inclined toward black-and-white thinking might argue, are becoming the only viable option for companies unable to find private buyers with secured financing.

Some IPO processes simply will not result in public listings, cautions Mark Bergman, co-head of the securities and capital markets group at Paul, Weiss, Rifkind, Wharton & Garrison. “It was not unusual in the past, and I suspect it will not be unusual in the future, to see parallel processes,” he told PEO.

Parallel or dual track processes, whereby the private equity sponsor simultaneously prepares an IPO and an M&A exit and then ultimately chooses whichever best suits it purposes, continue to be common, market participants say.

“Private equity firms are duty bound to cover all bases,” said one European GP, who noted that his firm has in the past pulled a portfolio company’s IPO in favour of a private sale.

In addition to providing a readily accessible “Plan B”, dual tracks also effectively create competitive tension that GPs hope will send their exit multiples soaring – which is another reason why a slew of IPO filings is a good thing.

Even if the companies don’t list, it demonstrates that GPs really are now readying exit routes – a turn of events liquidity-starved limited partners are sure to welcome.