Look at All the New IPOs

After months of market turmoil, are investors finally ready for a slew of brand-new stocks?

The owners of some private companies think so. In early August, Hyatt Hotels & Resorts announced plans to raise about $1 billion through an initial public offering. There's speculation that buyout giant Kohlberg Kravis Roberts is preparing retail chain Dollar General (DG) for a stock debut. Last month 12 companies filed with regulators to go public—the most since investment bank Lehman Brothers failed back in September 2008.

The conditions for IPOs have improved dramatically since the desolation of last winter. Stocks have rallied from their lows. And new companies are outperforming blue chips: The FTSE Renaissance Capital IPO Composite Index, which tracks the returns of IPOs, is up roughly 33% this year, vs. 7% for the Dow Jones industrial average. "Nobody's pushing any dogs here," says Gregg Slager of Ernst & Young's private equity consulting group.

To be sure, the glory days aren't back. The pipeline, though improving, isn't bursting with new listings: At the peak of the boom, dozens of companies filed to go public each month. And obviously the businesses can't raise $18 billion at a pop, as credit processor Visa (V) did with its offering in 2007. While the largest IPO of this year, Starwood Property Trust, raised the size of its offering from $500 million, it still raked in just $800 million in early August.

But the increased IPO activity may signal that the recession is easing—or at least that investors think the economy is on the mend. "There's confidence in the market," says Harris Smith, managing partner of private equity for Grant Thornton, a consulting firm. And "there's pent-up demand for new, quality stocks." After the dot-com bust, new stock offerings picked up just as the economy started to turn.

BUYOUTS RULEPrivate equity owners are the most active participants in the IPO markets nowadays. Of the 16 companies that have gone public this year, 8 are backed by buyout firms. And more IPOs are in the works. "There are a couple of companies that are definitely candidates [for going public]," Tony James, chief operations officer of Blackstone (BX), said in a recent earnings call. "If the markets hold up and continue the trend, you will see some IPOs from our portfolio."

The benefits for private equity are twofold. First, the firms can take advantage of the IPO market to generate returns for their investors, such as pension funds and endowments. For example, private equity-backed Bridgepoint Education, a company that runs for-profit universities, is trading near 20 after going public for 11 in April. Such successes are an important victory for private equity players trying to raise more cash from nervous investors. According to a top deal adviser who works with large buyout firms, most pension funds are asking their private equity partners: "Why don't you show us a little return on your current investments before you ask us for more money?"

Second, the private equity firms can use the cash from an IPO to lighten the debt load at a company in their portfolios, which could be a bonus for the highly leveraged economy. During the private equity boom, firms routinely saddled their holdings with large amounts of debt. Since lenders are skittish, companies are having a tough time refinancing their loans and bonds. The IPO market offers a cheaper way to raise cash, which can then be used to retire the debt of healthy companies.

Avago Technologies, backed by KKR and Silver Lake Management, is doing just that. In August the Singapore semiconductor maker sold $684 million worth of stock on the Nasdaq—the third-largest offering of the year behind Starwood and formula maker Mead Johnson Nutrition. Avago, which is still controlled by Silver Lake and KKR, has stated in regulatory filings that it plans to use the proceeds from the IPO to pay off a portion of its $704 million pile of debt. So far the stock is up. Says David Weild, a senior adviser at Grant Thornton: "Investors always want to be part of a stock with a good story."

Business Exchange: Read, save, and add content on BW's new Web 2.0 topic networkAn IPO Bubble?Shares of China State Construction Engineering popped 56% in their first day of trading in late July, while Sichuan Expressway posted an astronomical first-day gain of more than 300%. But columnist Alex Dumortier warns in a piece on The Motley Fool that the recent initial public offerings in China seem "bubble-icious." If Chinese authorities, he writes, move to cool the market, stock prices could get whacked. "Investors in Chinese stocks...need to be wary."To read the full article, go to http://bx.businessweek.com/initial-public-offering-ipo/reference/

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