US general partners should expect more initial public offerings of financial services companies in 2014 compared to 2013 thanks to rebounding public markets and rising valuations of businesses in the financial services sector, according to William Spiegel, co-founder and managing director at Pine Brook Partners.
“It wasn’t until 2013 that both the bank and insurance sectors really started to trade above book value,” Spiegel said, adding that the roughly 35 IPOs of financial services companies in 2012 rose to about 46 in 2013.
Pine Brook specialises in the energy and financial services sectors and took two companies public in 2013 – mortgage insurance company Essent Group and specialty property and casualty reinsurance business Third Point.
“The opportunities in financial services this past year and in the future are a function of the regulatory response to the financial crisis and how the regulators are going to implement the rules that have already been promulgated,” Spiegel said. “We’re still early in implementing many of the Dodd-Frank regulations that were promulgated a number of years ago.”
While IPOs represent a crucial lifeline for private equity firms seeking to exit portfolio companies, Pine Brook views IPOs more as a source of financing than an exit, according to Spiegel.
“It is the start of an exit plan for a private equity firm but it generally isn’t an exit unless you’ve sold 100 percent of your shares,” he said.
Another expected change in 2014 that will impact financial services companies is a rise in interest rates that have been kept low as a result of quantitative easing.
“If interest rates start moving, that’s really quite good for financial services,” Spiegel said.
However, a sudden rise in interest rates that changes public market supply and demand also poses a risk for private equity backed companies planning for an IPO, according to Spiegel.
“If rates rise too fast and the economy starts to sputter again, we could see companies hurt,” he said. “Most are going public based on a growth trajectory that may not be there.”
Still, Pine Brook remains bullish on financial services IPOs in 2014 due to strong expected earnings in the sector.
“You’re going to see profitability increasing in the banking sector and that could make for a pretty robust IPO market [in 2014] for bank stocks,” Spiegel said.