Initial public offerings from U.S. companies backed by private-equity firms are losing money for investors for the first time in at least a decade, making them the worst performers in 2010’s IPO market.
The 13 offerings by private-equity funds have fallen 2 percent in the first month of trading after averaging gains every year since at least 2001, according to data compiled by Bloomberg and Greenwich, Connecticut-based Renaissance Capital LLC. The IPOs have also lagged behind the Standard & Poor’s 500 Index, while companies without support from buyout firms have beaten the benchmark gauge for U.S. stocks by 5.8 percentage points after their initial sales.
The disparity indicates that investors are becoming less willing to purchase what private-equity firms are selling, even after funds from Blackstone Group LP to Apollo Global Management LLC offered the biggest IPO price cuts this year. The failure of buyers to profit from the share sales may hamper the funds as they try to offload some of the $2 trillion in leveraged buyouts made during the credit-market bubble, according to Rochdale Investment Management LLC and 1st Source Investment Advisors.
“Private-equity firms are trying to unload these deals to help pay down some of the excessive debt they took on to buy those businesses,” said David Abella, a manager at New York- based Rochdale, which oversees $2.9 billion. “These deals have not proved very attractive for fund managers, so they would probably be more likely to avoid them going forward.”
Great Depression, Lehman
The largest rebound in the S&P 500 since the Great Depression had spurred private-equity owners to turn to IPOs after returning less money to clients last year than at any time since at least 2000.
Money raised by LBO firms fell 78 percent to $35 billion in the fourth quarter of 2009, according to Preqin Ltd. of London, after the collapse of New York-based Lehman Brothers Holdings Inc. a year earlier stymied deals and froze credit markets.
Investors are now demanding bigger IPO discounts from private-equity firms after concern that Greece’s debt crisis is spreading helped spur the biggest weekly surge in stock-market volatility in two decades. At least 17 initial sales have been postponed or withdrawn worldwide this month, while U.S. companies that completed deals have been forced to cut their size by as much as 70 percent, data compiled by Bloomberg show.
‘The Window Opens’
“There’s a window when people can do IPOs,” said Jonathan Vyorst, who helps oversee $1.7 billion at New York-based Paradigm Capital Management Inc. “When the window opens, a lot of people rush to get deals done. That window may be closing.”
That means private-equity firms may have to “sell shares cheaper or they’ll have to wait,” he said.
A total of 333 initial offerings backed by buyout firms had generated average first-month gains of 11.4 percent from 2001 through last year, according to data compiled by Renaissance Capital, which has followed IPOs since 1991.
More than half of this year’s 13 initial sales from private-equity firms left buyers with losses, data compiled by Bloomberg show. Metals USA Holdings Corp., owned by Leon Black’s Apollo, and Carlyle Group’s Niska Gas Storage Partners LLC were among the companies that retreated.
Metals USA lost 28 percent in the first month after New York-based Apollo offered $240 million of shares in the company, which shapes steel and other alloys into parts. The April IPO of Fort Lauderdale, Florida-based Metals USA was the largest of one of Apollo’s U.S. portfolio companies since the credit crisis.
While the Metals USA offering created instant profits for Black, the 58-year-old former head of mergers and acquisitions at Drexel Burnham Lambert Inc. who founded Apollo in 1990, the shares fell four times as much as the S&P 500. The owners paid an average per-share price of $5.74 versus the IPO level of $21 each, filings with the Securities and Exchange Commission show.
Metals USA has $480 million in debt, about 5.54 times its $86.7 million in earnings before interest, taxes, depreciation and amortization this year, based on the company’s first quarter results and assuming its profit growth matched the average analyst’s estimate for Reliance Steel & Aluminum Co., the biggest company in the industry, Bloomberg data show.
That’s almost three times as high as Los Angeles-based Reliance Steel’s debt-to-Ebitda ratio of 1.91.
Niska, the natural-gas storage operator owned by Washington-based Carlyle and Riverstone Holdings LLC of New York, has fallen 7.6 percent since its May 11 offering. That’s more than double the S&P 500’s decline. The Houston-based company was valued at 6.35 times its tangible net assets, more than twice the median of 2.4 for 39 publicly traded U.S. competitors, data compiled by Bloomberg show.
“Companies coming from private equity weren’t necessarily the cream of the crop,” said Jason Cooper, who manages $2.5 billion at 1st Source Investment Advisors in South Bend, Indiana. “That’s the private-equity business model: you acquire, have these companies, and at some point you have to shed yourself of them and realize the gains.”
Discounts offered by private-equity firms to attract buyers to their IPOs haven’t guaranteed bigger returns.
While Graham Packaging Co. of York, Pennsylvania, gained 12 percent in its first month after New York-based Blackstone cut its IPO by more than half, Global Geophysical Services Inc. has slumped 17 percent since raising 54 percent less than Kelso & Co. of New York and its co-investors asked for in April. The Missouri City, Texas-based collector of underwater seismic data sold shares at $12 each after seeking as much as $17.
2010’s Biggest Deals
Private-equity firms are still pressing ahead with what may be the biggest initial U.S. offerings of 2010.
HCA Inc., the hospital chain bought four years ago in a $33 billion LBO led by New York-based KKR & Co. and Bain Capital LLC of Boston, filed this month to sell as much as $4.6 billion in shares. The Nashville, Tennessee-based company’s U.S. IPO would be the largest since Visa Inc. of San Francisco raised $19.7 billion in March 2008.
NXP Semiconductors NV, the Dutch chipmaker owned by KKR and Bain, said in April it will seek to sell $1.15 billion of shares. Apax Partners LLP in London was also among the private-equity funds that acquired Eindhoven, Netherlands-based NXP from Royal Philips Electronics NV of Amsterdam in 2006.
“The LBO firm is trying to return capital to its limited partners,” said Charles Bobrinskoy, who helps oversee $6 billion as vice chairman at Ariel Investments LLC in Chicago. “The last couple of years have been so tough with very few liquidity events. There are a number of institutions expressing skepticism about the big LBO fund model.”