GPs head for the exit

After being in a near coma for almost two years, the market for initial public offerings (IPOs) is showing signs of life. Rallying stock markets are presenting private equity firms with a long-awaited window of opportunity for exits.

As of June 30 this year only seven IPOs had been executed globally. Based on this figure, 2009 was on target to be the quietest 12-month period for more than 18 years. However, rallying stock markets – both

There is a clear disconnect between the amount of money that has been theoretically raised, and the amount of money that LPs are actually willing to stump up. Stephen Lloyd

the FTSE 100 and the S&P 500 have climbed by 47 percent and 57 percent since March respectively – have spurred several firms to ready their healthiest companies for IPO.

New Look, the UK high street retailer owned by Permira and Apax; Merlin Entertainment Group, the theme park operator controlled by The Blackstone Group; and Myer, the Australian department store owned by TPG, have all been linked to prospective IPOs in reports this week.

The initial stirrings of activity, say industry insiders, is down to a combination of factors, one of which being that the window for good quality IPOs will be limited.

“There is a feeling of a fin de siècle moment where you can get good IPOs away this year and next year,” says Stephen Lloyd, a London-based partner at law firm Ashurst, “But for the following three years there are going to be so many companies coming to market, that it might be quite difficult.”

Lloyd says that he and his London-based colleagues are working on a number of large private equity-backed IPOs due to come to market in the next six to nine months.

The enforced quiet period for private equity firms, for whom the credit crunch has meant investments and exits have been relatively rare, has meant that most have been focusing their efforts on improving – or at least maintaining –  the shape of their current portfolio. As a result the healthier investments – particularly those made during 2006 – are now ready for exit.

You are not buying companies, the portfolio is not increasing in value and you are not realising any investments and returning us capital…So are you going to return the management fees or capital? Wladimir Mollof

Debt repayment schedules are also driving the rush, says Lloyd: “With debt repayment profiles of 2013, ‘14 and ’15, there is a scary number of private equity-backed companies out there that will need their debt refinancing. The obvious source for this now is the IPO market.”

Aside from the pressures on individual companies, private equity firms themselves are motivated to realise some of their investments in order to avoid a ‘Mexican stand-off’ with limited partners.

“The pressure from LPs at the moment is ‘Do something!’,” says Wladimir Mollof, president of French fund of funds business ACG Private Equity, “You are not buying companies, the portfolio is not increasing in value and you are not realising any investments and returning us capital. So are you going to return the management fees or capital?”

The pressure to produce some exits (and hence distributions) goes beyond the need justify management fees. In most situations, limited partners are relying on some sort of cash return in order to meet existing commitments. “There is a clear disconnect between the amount of money that has theoretically been raised,” says Lloyd, “and the amount of money that limited partners are actually willing to stump up.”

In other words, many LPs committed to a fund on the assumption of distributions from previous funds, often managed by the same GP. The message is now, therefore, return some cash to us or the next capital call will be difficult.