A wave of initial public offerings in the U.S. this year will come from companies owned by private equity firms. KKR (KKR), Blackstone Group (BX), and Carlyle Group are betting that a continuing stock market rally will increase demand for some of the debt-fueled acquisitions they completed as credit markets started to freeze four years ago. "This is the first big window where we can see an exit," says Timothy Cunningham, a manager at Thornberg Investment Management. "Private equity funds will try to take advantage of that."
HCA Holdings, Nielsen Holdings, Kinder Morgan, and more than two dozen other companies owned by private equity firms have registered with the Securities and Exchange Commission to sell $14 billion of shares in initial offerings, or 53 percent of the amount on file, according to data compiled by Bloomberg. That total is more than double the $6.6 billion raised in 2010, when private-equity-backed IPOs accounted for 15 percent of total offerings.
Overall, more than 120 companies are seeking approval from the SEC to raise about $26 billion through IPOs. Barclays (BCS) estimates that U.S. companies will complete as much as $50 billion of sales this year, a 34 percent increase from 2010.
Investors have reason to be wary of private-equity-backed offerings. Shares of the 31 companies brought public by private equity firms in the U.S. last year rose 3.8 percent on average in the first month of trading, less than half the 8.1 percent first-month advance for all other IPOs, data compiled by Bloomberg show. Venture-capital-backed offerings, which raised $3.2 billion, increased 7.8 percent on average.
The private-equity-backed companies scheduled to go public this year have almost twice the net debt to operating cash flow as the average private-equity-backed IPO last year. That's a concern, says Lawrence Creatura, fund manager at Federated Investors: "You'll have to endure the burden that most free cash flow is going towards debt service and debt pay-down."
Companies backed by venture capital firms have filed to raise $2.86 billion in IPOs, a decrease from last year's total. Venture-backed companies such as Facebook and Twitter have shown they can raise equity capital without seeking an IPO. Facebook raised $500 million from Goldman Sachs (GS) and Russia's Digital Sky Technologies, according to three people familiar with the matter. Groupon, the daily-deal coupon site based in Chicago, raised $500 million in its latest round of financing, according to its SEC filing in late December.
Companies controlled by buyout firms face more pressure to go public both to pay back debt and to allow their owners to cash out, says Tim Loughran, a finance professor at the University of Notre Dame's Mendoza College of Business. "Facebook and companies like that can already sell equity without doing an IPO," says Loughran. "They can wait for a really good time to go public. The private equity firms have a lot of debt which forces [them] to move at a quicker pace."
The bottom line: With stocks rallying, private equity firms see a chance to sell shares of companies they bought using lots of borrowed money.