Beware of Buyout Firms Bearing IPOs

The stock market rally of the past year has encouraged leveraged buyout firms to sell more of the companies they own to the public. The people who buy shares in those companies, though, have had reason to regret it. Initial public offerings from U.S. companies backed by private-equity firms are losing money, on average, for investors for the first time in at least a decade, making them the worst performers in 2010's IPO market.

The stocks have fared poorly even though in many cases buyout firms cut the prices and the number of shares in the deals. Prices of the 13 offerings this year by private-equity funds have fallen by an average of 2 percent in the first month of trading, according to data compiled by Bloomberg and Renaissance Capital in Greenwich, Conn. A total of 333 initial offerings backed by buyout firms 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.

The IPOs have also lagged the Standard & Poor's 500-stock index, while companies without support from buyout firms have beaten that benchmark by 5.8 percentage points after their initial sales, as of May 18. More than half of this year's sales from private-equity firms left buyers with losses. Metals USA Holdings (MUSA), owned by Leon Black's Apollo Management and Niska Gas Storage Partners (NKA), owned in part by the Carlyle Group, were among the companies that retreated.

The failure of buyers to profit from the share sales may hamper the funds' efforts to offload some of the companies they bought during the $2 trillion leveraged buyout-spree of the credit-market bubble. These IPO shares "have not proved very attractive for fund managers," says David Abella, a portfolio manager at Rochdale Investment Management in New York. "So they would probably be more likely to avoid them going forward."

As Greece's debt crisis helped spur the biggest weekly surge in stock-market volatility in two decades, at least 17 initial sales were postponed or withdrawn worldwide in May. U.S. companies that completed offerings in May were forced to cut their size by as much as 70 percent, data compiled by Bloomberg show. "There's a window when people can do IPOs," says Jonathan Vyorst, who helps oversee $1.7 billion at New York-based Paradigm Capital Management. "When the window opens, a lot of people rush to get deals done. That window may be closing."

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 the Fort Lauderdale (Fla.) company was the largest U.S. offering of an Apollo company since the credit crisis.

Niska, the natural-gas storage operator owned by Washington-based Carlyle and Riverstone Holdings 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 company was valued at 6.35 times its tangible net assets, almost three times the median of 2.33 for 39 publicly traded U.S. competitors, Bloomberg data show.

Discounts offered to attract buyers haven't guaranteed bigger returns. While Graham Packaging of York, Penn., gained 12 percent in its first month after Blackstone (BX) cut the size of its IPO by more than half, Global Geophysical Services has slumped 17 percent since raising 54 percent less than Kelso and its co-investors asked for in April.

"Companies coming from private equity weren't necessarily the cream of the crop," says Jason Cooper, who manages $2.5 billion at 1st Source Investment Advisors in South Bend, Ind. "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."

Private-equity firms are still pressing ahead with what may be the biggest initial U.S. offering of 2010. HCA, the hospital chain bought four years ago in a $33 billion LBO led by Kohlberg Kravis & Roberts (KFN) and Bain Capital, filed this month to sell as much as $4.6 billion in shares. The Nashville (Tenn.)-based company's U.S. IPO would be the largest since Visa (V) of San Francisco raised $19.7 billion in March 2008.

The bottom line: Buyout firms have a backlog of companies acquired during the boom. Even discount prices may not make them good investments.

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